The Business Risk Audit: Origins, Challenges and the Role of Research. W. Robert Knechel, PhD, CPA University of Florida

Transcription

1 The Business Risk Audit: Origins, Challenges and the Role of Research W. Robert Knechel, PhD, CPA University of Florida

2 Overview Casual empiricism circa The Inward Revolution: When conventional wisdom becomes controversy. The search for credibility in the 1990s. Challenging audit rituals. The Outward Rebellion: Credibility redux. Research and the role of empiricism Closing remarks

3 Some Casual Empiricism circa 1990 Clients exert tremendous fee pressure on auditors. Competitive bidding, whether open or disguised, is a way of life. Chargeable hours on engagements are being systematically reduced. Educational, training and technology costs are increasing. Clients want more for their money. Clients are bringing more auditing in-house. >11% of gross audit fees go to cover practice protection costs. Sample sizes see dramatic reductions. Technology becomes (and will continue to become) increasingly sophisticated.

4 The Audit Process in 1992 Risk Assessment Evaluate and Test Controls Preliminary APs Understand the Client Audit Plan Substantive APs CAATs Evidence Gathering Substantive Tests of Transactions and Details

5 When Conventional Wisdom becomes Controversy: Starting an Inward Revolution Policy Assurance and independence Management fidelity Structure and judgment Process Collaboration and professional skepticism Internal control and risk management Performance measurement and analytical procedures Sampling risk Nonsampling risk

6 The Search for Credibility in the 1990s: An Inward Perspective More education. Just-in-time training efforts. Increased industry specialization. Better client acceptance procedures. Reduced reliance on mundane tests of account details. Shift towards experienced personnel. Greater use of technology. Starting over the reengineering phenomena. Efficiency, effectiveness or something else?

7 Audit Process Reengineering Activity based management principles Proof of concept training The Green Book Pilot testing International roll-out Development of new tools and aids Strategic analysis Management level controls Process analysis Performance measurement

8 The Risk Assessment Process Organizational Business Models Strategic Analysis External Threat Analysis Strategic Business Risks Risk Evaluation Process Analysis Process Maps Internal Threat Analysis Process Business Risks Risk Evaluation Residual Risks Implications? Assurance about Current Conditions

9 Business Risk Audits: The Best of Intentions Risk Assessment Evaluate and Test Controls Preliminary APs Understand the Client Client Service Plan Substantive APs CAATs Substantive Tests Evidence Gathering

10 Challenging Audit Rituals Client rituals: Managing expectations. Bypassing the accounting executive. Empowering the auditor. Communications with stakeholders. Audit team issues: Uncertainty of process Uncertainty of tasks Uncertainties about training Uncertainty of evidence Uncertainty of the future Stakeholder/external issues: Managing public expectations. Meeting assurance goals

11 Are Auditors More Credible? Risk Assessment Evaluate and Test Controls Preliminary APs Understand the Client Client Service Plan Substantive APs Computer Tests Substantive Tests Evidence Gathering

12 Threats to Credibility: An Outward Rebellion What s NOT new? Bubbles burst skeletons in the closet revealed. Some managers have questionable integrity. The four deadly sins of accounting. What is Different? Expectations for mechanisms of corporate governance. Broadening of the stakeholder group. Complexity breeds accounting tricks or is it other way around? An international infection? Too much consulting?

13 Vide et crede or In dubio? Remaining Challenges Reconcile business risk auditing with new regulatory environment. Need for a new audit risk model Risk assessment is not an audit. New models for evaluating controls. Linking risk to tests controls and assertions New methods for using performance measurement as audit evidence. Value-added versus fee-added efforts. Education, training and knowledge assets.

14 Theory Data Contemporary Social Research as Cynosure Quantitative Qualitative Method Analytical Historical

15 Data Contemporary Research as Cynosure Quantitative Social Theory Data Ideas Qualitative Method Analytical Historical

16 An Example: Performance Measurement Perceived Performance Gap PM E(PM) Factual Validity Purposive Validity S G Actual Performance Gap

17 Of Kuhn and Kant: Some Final Thoughts on Audit Research Theory, Empiricism and Persuasion Before I was married I had three theories of childrearing; Now I have three children and no theories. Earl of Rochester, Human sacrifice in the academy. Theory, religion and genetic imprinting Structure in Research: Rigorous observation versus abject chaos. The redundancy of data. The Scientific Method: When not knowing is knowing.

18 Closing Remarks In research, the horizon recedes as we advance, and is no nearer at sixty than at twenty research is always incomplete. (Mark Pattison, 1875) Mathematics has given economics rigor but, alas, also mortis. (Robert Heilbronner, date unknown) There are now-a-days professors of philosophy but not philosophers. (Henry David Thoreau, 1862). Research is about balance. One can always drink white wine with fish and red wine with meat, or, one can experiment with a fresh pinot noir with salmon and a rich montrachet with veal.

19 Thank You!