Audit Quality
Mohammad hossein Setayesh; Younes Masoudi; Elias Dehdari; Mina Sadeghi
Abstract
This research explores the impact of mental accounting on audit quality, particularly focusing on how auditors' cognitive biases influence their judgments and decision-making. By understanding these biases, auditors can better identify risks and improve audit processes. The study is applied, quantitative, ...
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This research explores the impact of mental accounting on audit quality, particularly focusing on how auditors' cognitive biases influence their judgments and decision-making. By understanding these biases, auditors can better identify risks and improve audit processes. The study is applied, quantitative, and descriptive, conducted through surveys with 203 certified accountants in Iran. The findings indicate that mental accounting affects auditors' judgments, the allocation of partners' working time, and performance defense costs in lawsuits, but it does not impact auditor independence. The research concludes that mental accounting influences overall audit quality. By increasing auditors' awareness of mental accounting and its effects, the quality of their audits can improve. These insights highlight the importance of recognizing behavioral biases in auditing to enhance the effectiveness and accuracy of audit practices. IntroductionIn a world without audits, trust in financial reporting would erode, leading to chaos in financial statements. Audit quality is essential for ensuring reliability and transparency, serving as a safeguard against errors and fraud. Understanding auditors' cognitive processes, particularly mental accounting, is crucial for enhancing audit quality and improving decision-making in the classification of financial resources.In the 1980s, Richard Thaler and Amos Tursky popularized the concept of mental accounting, demonstrating how mental limitations can lead to irrational financial decisions. This theory, widely accepted by psychologists, economists, and auditors, consists of three key elements: the coding, classification, and evaluation of mental accounts. Additionally, expectations theory addresses decision-making under risk. By understanding mental accounts, auditors can gain valuable insights into financial behaviors, ultimately improving audit quality. This makes mental accounting a vital tool for combating financial abuses and enhancing overall financial integrity.Research hypothesesMental accounting influences audit quality.Mental accounting affects the auditor's judgment.Mental accounting impacts the ratio of partners' work time to the total work time in the audit budget.Mental accounting influences the auditor's independence.Mental accounting affects the process of defending performance costs in lawsuits.Literature ReviewAudit quality is rooted in trust and confidence, stemming from auditors' adherence to professional standards and their ability to provide reliable information. It can be likened to a trustworthy friend who keeps promises, relying on key elements such as competence, independence, honesty, and professional skepticism. Definitions of audit quality vary but generally emphasize auditors’ ability to detect violations and ensure high-quality financial reporting. Compliance with audit standards serves as a key indicator of audit quality. Furthermore, the theory of mental accounting enhances audit quality by enabling auditors to better understand financial processes and how individuals categorize their resources, making it a valuable tool for improving overall audit practices.Integrating mental accounting with audit quality can significantly enhance the audit process and build trust in financial reporting. Mental accounting identifies behavioral biases that influence auditors' decision-making by examining how financial resources and decisions are categorized. By recognizing these biases, auditors can implement strategies to mitigate their effects, thereby improving audit quality. Additionally, applying mental accounting principles helps auditors select effective methods for gathering and interpreting evidence, ensuring more reliable and accurate audits. This synergy fosters greater accuracy and reliability in financial reports, ultimately strengthening public trust in the audit system.MethodologyThis research adopts an applied approach and a survey method to enhance auditing knowledge, focusing on partners, managers, and certified accountants from A-grade audit institutions in Iran. Data collection was conducted using a questionnaire, whose validity was confirmed through face validity and necessary revisions. Reliability was established using Cronbach's alpha, ensuring the questionnaire is a reliable tool for measuring the research variables.ConclusionThis research highlights the role of mental accounting in enhancing audit quality, building on Thaler's foundational work. It identifies four specific variables to measure audit quality, demonstrating that mental accounting affects auditors' judgments, partners' work time allocation, and defense costs in lawsuits, but not auditor independence. The findings confirm that mental accounting positively influences audit quality, aligning with earlier studies by Bonabi Ghadim and Karbasi Yazdi (2013) and Stephen (2018).Additionally, the research examined the influence of participants' demographic information on the hypotheses, concluding that these factors did not affect the outcomes, as the results remained consistent across all demographic groups.AcknowledgmentsIn conclusion, we extend our gratitude to the partners, managers, and members of the public accountants’ community in Iran for their invaluable assistance and the generous time they dedicated to supporting this research.
Accounting and various aspects of finance
Mohammad Hossein Setayesh; Zahra Rezaeianzadeh
Abstract
The main goal of this research is to identify and rank factors affecting innovation in accounting. In this research, firstly, accounting specialists were selected by purposeful sampling methods, and then qualitative data were collected using open questionnaires. After analyzing the collected data using ...
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The main goal of this research is to identify and rank factors affecting innovation in accounting. In this research, firstly, accounting specialists were selected by purposeful sampling methods, and then qualitative data were collected using open questionnaires. After analyzing the collected data using the phenomenology method, 11 factors were identified. Subsequently, a survey involving 17 faculty members from the accounting departments of Iranian public universities was conducted, and the Bayesian best-worst method was employed to rank these identified factors. Based on the results, the top 3 factors affecting innovation in accounting, in order of importance, include advances in information technology, changes in the business environment, and the level of financial knowledge and analytical skills of accountants. In order to improve the context of innovation in accounting, the results of this research suggest accountants should have general information about business and advances in information technology. They also, as the human capital of the innovation process in accounting, should continuously improve their level of financial knowledge and analytical skills.IntroductionIn recent years, the information technologies, such as cloud service models, big data, artificial intelligence, and blockchain are rapidly transforming the business environments and have raised concerns about the future of the accounting profession. Although these emerging technologies are still designed for the day-to-day work of accountants, they can significantly change the future work of accountants (Moll & Yigitbasioglu, 2019). It seems that in the face of the said technologies, the provision of accounting services, such as bookkeeping, preparing financial statements, preparing tax returns, and auditing, have all been subject to radical innovations (Bowles et al., 2020). According to the accounting literature, a new set of skills is necessary for accountants due to these emerging technologies. This is while job advertisements of Iranian companies (https://www.irantalent.com), still demand traditional job roles for accountants and instead, new job titles, such as fraud investigation specialist and senior data analyst have been emerging that can cover the newly defined job roles of accountants by literature. It seems that to reinforce the position of accountants in organizations, a change in accounting and in other words, the search for innovation in accounting is necessary.To address the lack of accounting literature in the field of innovation, the primary objective of this study is to identify and rank the factors that impact innovation in accounting by using qualitative methods, to initiate the expansion of innovative thinking and the creation of innovative ideas in accounting.MethodologyThis study used the phenomenology method to identify the factors affecting innovation in accounting. The accounting specialists were chosen as an informant using purposeful and snowball sampling methods. The twelve accounting specialists who participated in the research offered a wide range of services, including auditing, consulting, financial statement preparation, and tax accounting. Data collection was carried out mainly by means of an unstructured questionnaire supported by a telephone interview. Finally, by the use of Colaizzi’s method of data analysis, the factors affecting innovation in accounting were identified (Wirihana et al., 2018, p. 31).The Bayesian best-worst method was selected to rank the factors affecting innovation in accounting. The decision-makers were seventeen faculty members in the accounting department of Iranian public universities who had publications that transfer the concept of some sort of innovation in accounting. Bayesian best-worst method is based on pairwise comparison (Mohammadi & Rezaei, 2020). Pairwise comparison data from the decision-makers who participated in the research was collected through a standard questionnaire. Finally, using Python code for the chosen method, the factors affecting innovation in accounting were ranked.Results and DiscussionAccording to the results of Colaizzi’s method of data analysis, eleven factors were identified, and using the Bayesian best-worst method, the optimal weight of all factors was calculated. Table 1 presents the overall optimal weight and rank of factors affecting innovation in accounting. The findings indicate that the factors of advances in information technology (0.127806), changes in the business environment (0.12760311), and the level of financial knowledge and analytical skills of accountants (0.10951763) are respectively the most important factors. According to the optimal weight of all factors, it can be seen that none of the factors are irrelevant to innovation in accounting, because the weight of the least important factor is equal to 0.06665689. In fact, neither factor has an optimal weight lower than 0.065.ConclusionThe field of research into innovation in accounting is new, therefore this research generates new insight into the area. Among the practical implications, the study suggests that accountants consider environmental factors, such as advances in information technology and constantly update their knowledge and skills. It also suggests that they should improve their overall business knowledge by familiarizing themselves with different companies' operations and financial processes. Moreover, it suggests that they develop their analytical skills to be able to clarify the implications of decision-making results. Lastly, this study suggests that to achieve innovation in accounting, the conduct of research related to innovation and the cooperation of accountants can generate ideas to improve innovation in accounting.The study was qualitative in nature, as a result, this study cannot argue that the nature of innovation in accounting and the factors affecting it remain unchanged over time. Therefore, this study recommends more research in this field to contribute to a better understanding of innovation in accounting.
Accounting report
Fahime Ebrahimi; Mohammad Hosein Setayesh; Hamidreza Zareifard
Abstract
Prospect theory explains how individuals’ feelings and preferences influence their decision-making. The purpose of this research was to investigate earnings manipulation incentives within companies listed in Tehran Stock Exchange using fourfold pattern of risk attitudes provided by the cumulative ...
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Prospect theory explains how individuals’ feelings and preferences influence their decision-making. The purpose of this research was to investigate earnings manipulation incentives within companies listed in Tehran Stock Exchange using fourfold pattern of risk attitudes provided by the cumulative prospect theory. The period of this research was 6 years, from 2013 to 2018 and included 695 observations. Hypothesis testing using logistic regression, with the average competitor performance within the industry as the reference point, revealed a significant positive (vs. negative) effect of management’s loss (vs. gain) estimates relative to the reference point on earnings manipulation. In other words, when management’s estimate of the likelihood of loss relative to the reference point is high (vs. low), the likelihood of earnings manipulation increases (vs. decreases). Furthermore, when management’s estimate of the likelihood of gain relative to the reference point is low (vs. high), the likelihood of earnings manipulation increases (vs. decreases). The findings of research also provided evidence for loss-aversion among managers. Therefore, the evidence suggests that the cumulative prospect theory can be utilized to explain managerial incentives for earnings manipulation.
Mohamad Hosein Setayesh0F; Manoochehr Roosta
Volume 11, Issue 44 , March 2015, , Pages 71-95
Abstract
Conservatism is the asymmetries of approving earnings and costs. This asymmetric can be influential on financial performance of the firms which is reported in terms of figures of financial statements. The purpose of this study is the investigation of the relationship between accounting conservatism and ...
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Conservatism is the asymmetries of approving earnings and costs. This asymmetric can be influential on financial performance of the firms which is reported in terms of figures of financial statements. The purpose of this study is the investigation of the relationship between accounting conservatism and financial efficiency scores as a comprehensive measure of financial performance. For this purpose, the variables of balance sheet conservatism, earnings conservatism and combined conservatism were examined along with financial efficiency scores. Based on 123 corporations from 2002 to 2011 and fixed effects model, results indicate that there is no relationship between balance sheet conservatism and financial efficiency scores, but the relationships between earnings and combined conservatism with financial efficiency scores are positive. In addition, companies have been categorized to two groups with high and low level financial efficiency scores, based on first and third quartiles of financial efficiency scores 10 years average. The results indicate that there is no significant difference between the groups with high and low scores in terms of earnings and combined conservatism.
