AUDITORS AND THEIR RESPONSE TO DIFFICULT ACCOUNTING ISSUES58
This research project is related to audits in which difficult accounting measurement or valuation issues with a potentially material impact to the financial statements arose.
“Difficult” means that there was an initial difference of opinion between you and your client about the appropriate accounting. Most studies in this area are made on experimental data and studies on real data will therefore contribute to our understanding of the judgments auditors really make.
The study has a particular focus on what auditors do when they experience such difficult accounting issues. To successfully be able to analyze this, a number of questions are included in part B which at first sight may seem very similar. This is a consequence of the research design used in the project, and as a consequence it is important that you read all questions and statements carefully.
Enclosed to this introductory letter you will find 3 questionnaires and I ask you to complete these for three different clients. Completion of these three questionnaires will take in total between 45 and 60 minutes. It is not necessary for all the questionnaires to be filled in at the same occasion; you may well answer them one at a time if that is more convenient for you. It is important that you do not discuss the questionnaire with any of your colleagues, if you have any questions, please do not hesitate to contact the researcher. When you have answered one of the questionnaires, please put it in an envelope and seal it. When all questionnaires are filled in, they should be delivered in a large sealed envelope to: nn.
In this study you are asked to identify to yourself the three of your clients (for whom you are the engagement leader) which generate the largest audit fee and with whom you experienced one or more such difficult issues, as defined above, during the 2008-audit (exclude
governmental clients and clients belonging to the banking and insurance industry).
58 This appendix is a translation of the questionnaire that was used when collection data in 2010. The layout in the translation differs slightly from the layout in the original questionnaire due to differing lengths of words etc.
If you did not experience such difficult accounting issues with any of your clients in 2008 (or you experienced it with less than three clients), you may include audits from previous years among the clients about which you fill in the questionnaires.
If you experienced more than one difficult accounting issue with any of the identified clients, please answer the questionnaire with the issue that potentially could have the largest monetary impact for the financial statements in mind.
Your response will be very valuable as the utility of the study requires a high response rate.
Thank you in advance for your contribution! If you want a summary of the findings of the study please send an e-mail the researcher: (ellen.kulset@nhh.no).
Regards,
Ellen M. Kulset
Research scholar, NHH
The following part was included in the letter from the Head of the audit firm accompanying the questionnaire:
“The questionnaire is developed in cooperation with the central consultation unit of <audit firm>. The study is anonymous and all responses will be kept strictly confidential. The questionnaire is developed solely for the purpose of this study and the responses will be destroyed when the study is completed. All responses will be publicized only in an aggregated format”.
PART A. INFORMATION ABOUT THE ACCOUNTING ISSUE
1. For your own reference, please write a title that will identify the issue to you but will not identify you or your client to us
_____________________________________________________________________
__________
2. Please give a verbal description of the issue you and your client disagreed about such as “We disagreed about the size of the allowance for bad debts” or “I could not accept the recognition of income related to a large contract without more information” etc.
Please be as specific as possible in your description (include important journal entries).
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
3. Why did the issue arise?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
4. In what accounting year was the issue discussed? __________________________
5. What accounting implications did the issue have? Please check all boxes that apply.
Income measurement o Footnote disclosure o
Cost measurement o Tax implications o
Balance sheet valuation o Business event / transaction implicationo Income / balance sheet classification o Contractual implications o 6. How material was the issue to the client’s financial reporting? Please check all boxes
that apply.
Material by itself: (a) in the current year o (b) in future yearso Material in another way o please specify
_____________________________________________________________________
Not material o (if so, why was it an issue?
____________________________________________________________________
7. The issue could potentially:
Decrease income / increase costs o Increase income /decrease costs o Have no effect on income or costso
PART B. PROCESS
8. To what extent do the following statements give a proper description of what you did during the resolution process? Please answer all items and check one box for each.
Notice that there is a distinction between a compromise and a new solution: a new solution is not a “split-the difference”-solution. An example of a new solution is a disagreement in which the auditor believes that an amount must be accounted for whereas the client is of the opinion that the amount should not be accounted. After careful studying of the accounting rules, the auditor and the client agree that the amount can be accounted for directly towards the equity.
Also note that not all of the statements below are relevant for all types of disagreements. If a statement is not relevant for the issue you describe in this
questionnaire, (it is for instance unusual to be able to come up with a new solution if you and your client disagree about the size of the provision for bad debts) you are asked to cross in the box “No agreement”.
Degree of agreement with statement (Indicate on an 8-point scale59 from “No agreement” to “Very high agreement”)
1. I tried to satisfy the expectations of the client. / Jeg forsøkte å møte kundens forventninger.
2. I used “give and take” so that a compromise could be made. / Jeg brukte “gi og ta”-strategi for å muliggjøre et kompromiss.
3. I used my ability to qualify the client’s financial statements to obtain a resolution in my favor. /For å oppnå en løsning i min favør, ga jeg kunden beskjed om at han ikke ville få ren beretning dersom han ikke endret sin regnskapsføring.
4. I argued with the client to show them the merits of my position. / Jeg diskuterte med kunden for å vise dem fordelene ved min løsning.
5. I tried to find some middle ground to resolve this issue with the client. / Jeg forsøkte å finne en løsning som var akseptabel for både kunden og meg.
6. I used my influence to get my position accepted by the client /Jeg brukte min innflytelse som revisor for å få mitt forslag akseptert av kunden.
7. I attempted to accommodate the wishes of the client. / Jeg forsøkte å tilpasse løsningen slik at den var i samsvar med kundens ønsker.
8. I collaborated with the client to come up with a new solution acceptable to all of us. / Jeg samarbeidet med kunden for å komme opp med en ny løsning som var akseptabel for oss begge.
9. I used my expertise in accounting to influence the resolution in my favor. / Jeg brukte min regnskapskompetanse for å påvirke kunden i min favør.
59 The scale was included in the Norwegian questionnaire with 8 boxes in which the auditor could tick with the alternatives: “no” – “very low” – “low” – “low to moderate” – “moderate” – “moderate to high” – “high” and
“very high” agreement with statement
10. I tried to work with the client to find new solutions to this issue that satisfied both of our
expectations. /Jeg diskuterte med kunden for å finne en ny løsning som var i samsvar med begges forventninger.
11. I tried to investigate the issue further with the client to find a new solution accetable to both of us. / Jeg forsøkte å finne ut mer om regnskapsspørsmålet slik at vi kunne finne en ny løsning som var akseptabel for både kunden og meg.
12. I tried to satisfy the needs of the client. / Jeg forsøkte å tilfredsstille kundens behov.
13. I made concessions from my position to the client. / Jeg endret min løsning slik at den ble mer lik den løsningen kunden hadde foreslått.
14. I tried to bring all my concerns about this issue into the open with the client so that the issue could be resolved in the best possible way. / Jeg forsøkte å ha en åpen dialog med kunden om alle forhold av betydning for regnskapsspørsmålet slik at vi kunne finne en best mulig løsning.
15. I proposed some middle ground on this issue at some point during the process of resolving the disagreement with the client. / I løpet av prosessen foreslo jeg en kompromissløsning for å få finne en løsning på uenigheten knyttet til regnskapsspørsmålet.
16. I negotiated with the client so that a compromise could be made. / Jeg forhandlet med kunden for å komme frem til et kompromiss.
17. I was firm in pursuing my position. / Jeg holdt fast ved min egen løsning.
18. I gave in to the wishes of the client. / Jeg ga etter for kundens ønsker.
19. I tried to integrate my ideas about how to resolve this issue with the client to come up with a new solution jointly / Jeg forsøkte å kombinere våre ideer om hvordan spørsmålet kunne løses slik at kunden og jeg sammen kunne prøve å finne en ny løsning.
20. I played down the differences with the client to reach a compromise. / Jeg forsøkte å bagatellisere uenigheten med kunden for å oppnå en kompromissløsning.
PART C. AGREEMENT
9. What was the final treatment of the issue in the financial statements? Please check the one of the 6 boxes that most closely applies:
a. Treated as the client originally desired because the client demonstrated it was
in compliance with GAAP o
b. Treated as the client originally desired because there was no convincing
evidence the client’s position was incorrect o
c. Treated as the client originally desired for some other reason, please explain o ___________________________________________________________
_________________________________________________________________
d. Treated as the auditor originally desired o
e. A compromise was found somewhere between the original positions o
f. A new solution was generated in the process o
10. Give a supplementary verbal description of the final solution that you checked for in question 9.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
11. To what extent give the accounting rules give a clear answer to what the solution had to be?
Very low o Low o Neither high nor low o High o Very high o
12. What happened after the resolution? Please check one box for each item.
a. The client received a clean audit opinion Yes o No o If no, was this caused by accounting issue described in this questionnaire
Yes o No o b. The issue was to be considered again in subsequent years Yes o No o c. You or your audit firm are likely to audit the client next year Yes o No o d. The board was informed about the resolution Yes o No o
e. Other important post-resolution events Yes o No o
please describe
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
To solve an accounting issue, it is necessary to possess different types of knowledge.
Important types of knowledge are for instance
- business knowledge (i.e. knowledge about the client’s industry, the client itself, the client’s suppliers etc. “et selskaps drift, inkl kunnskap om kunder,
leverandører, industri etc”
- technical accounting knowledge (i.e. knowledge about how to understand and interpret accounting standards etc.)
13. To what extent was it necessary to have technical accounting knowledge to solve the issue?
Extremely important o Very important o Important o Not so important o Not important at all o
14. To what extent did the client have this technical accounting knowledge?
Very high o High o Not high nor low o Low o Very low o 15. To what extent was it necessary to have business knowledge to solve the issue?
Not important at all o Not so important o Important o Very important o Extremely important o
16. To what extent did the client have this business knowledge?
Very low o Low o Not high nor low o High o Very high o
PART D. CLIENT SPECIFIC DEMOGRAPHIC ITEMS.
17. How do you rate the audit risk of the client as compared to the rest of your client base?
Very high o Higho Neither high nor low o Low o Very low o
18. How large is the audit fee on this client compared to the total audit fee generated by your clients?
More than 50% o Between 30 and 50 % o Between 10 and 30 % o Less than 10 % o
19. Please classify the client by checking all the boxes that applies:
Public company o Non-traded subsidiary of public company o Private company o
20. Industry: please check one box
Telecom, media and high-tech o
Utilities o
Shipping o
Oil and gas o
Manufacturing o
Merchandising o
Other o, please specify
21. Please estimate the client’s size (will not be used to identify client):
Annual revenue: Less than 10 million NOK o
Between 10 million and 50 million NOK o
Between 50 million and 100 million NOK o
Between 100 and 500 million NOK o
Between 500 million NOK and 1000 million NOK o Between1000 million NOK and 3000 million NOK o
More than 3000 million NOK o
Total assets: Less than 50 million o
Between 50 and 100 million o
Between 100 and 500 million o
More than 500 million o
22. Did the industry experience problems with profitability in 2008? Yes o No o 23. Did you need to consider managements plans to mitigate
GC-problems during the 2008-audit Yeso Noo
24. How large was the client’s reported profit as % of income last year
Negative o Approx. 0 o Positive but smaller than 5% o Between 5 and 10% o Larger than 10 % o
25. To what degree did client management use an aggressive reporting strategy?
Very high o High o Neither high nor low o Low o Very low o 26. Indicate the degree to which you agree with the following statements
a. The client’s top management has a strong sense of justice
Disagree strongly o Disagree o Neither disagree nor agree o Agree o Agree stronglyo
b. I never have to wonder whether the client’s top management will stick to its word
Disagree strongly o Disagree o Neither disagree nor agree o Agree o Agree strongly o
c. The client’s top management tries hard to be fair in dealings with others Disagree strongly o Disagree o Neither disagree nor agree o Agree o Agree strongly o
d. The client’s top management’s actions and behaviors are not very consistent Disagree strongly o Disagree o Neither disagree nor agree o Agree o Agree strongly o
e. I like the client’s top management’s values
Disagree strongly o Disagree o Neither disagree nor agree o Agree o Agree strongly o
f. Sound principles seem to guide the client’s top management’s behavior Disagree strongly o Disagree o Neither disagree nor agree o Agree o Agree strongly o
PART E. INFORMATION ABOUT THE AUDIT OF THIS CLIENT
27. How do you rate your relationship with the client compared to your relationship with your other clients?
A lot better o Better o Neither better nor worse o Worse o A lot worse o 28. How long have you been the audit partner on this engagement? ______years
29. How long has the company been a client with <audit firm>
PART F. INFORMATION ABOUT THE AUDITOR
30. With how many of your clients do you normally experience “difficult” issues, as defined in the introduction, during an accounting year? ____________________
clients
31. How long have you been partner in the < audit firm >? _____________
32. How many years of audit experience do you have? ________________
33. How many clients do you have? ________________________
34. How many of your clients have an audit fee above NOK 500.000?
__________________
35. Are you an international partner in the <audit firm>? Yes o No o
CONCLUDING REMARKS
If you have any concluding remarks, please give these below.
Appendix 2 - Descriptive statistics: frequency tables for negotiation statements used in