medical care in a rural hospital where there is zero to very low levels of
gang violence and drug trafficking in
an urban area where there is just outside of the urban area
a bunch of legal crops of illicit drugs and so there's a much higher incidence
of hard cases coming to the ER at this metropolitan hospital versus a rural hospital.
So, one thing you have to do as a researcher and
as an investor when you're trying to think about audit quality,
is control for the type of patients if you will that the audit firms are dealing with.
Now, the other thing that I like about
the Financial Reporting Council view audit quality,
it takes full stock of how their audit report in the UK differs from
the audit report you see in the United States and they would
tell you that the auditor's opinion is two fold.
It's not simply that the financial statements
comply in all material respects to Generally Accepted Accounting Principles.
No, it says in addition to that,
it says that the financial statements in the auditor's opinion provide
a true and fair view of that company's operations financial position and cash flows.
I love that. I think that brings tremendous value to
the report but they're also stressing that this
is inherently subjective and you're going to get
different judgments by different engagement partners.
Much like you would get different judgments by
very different, highly specialized positions.
You go get second opinions and if you have a different opinion from one let's say
eye specialist about whether surgery is advised compared to
another specialist who has a different view about whether surgery is advised.
That doesn't mean that one is incompetent.
That means they have a difference in judgment, subjective professional judgment.
In the academic space,
audit quality is divided into three areas primarily.
One is competence and actually coming up with
your audit findings which means competence and
planning the audit and getting the evidence.
So, there's the competence in getting the evidence and
then there is honesty in reporting what you really find.
So, that's a little bit of an artificial bifurcation but it does get at, "Hey,
are you competent in what you do and do you have the courage and
integrity in the call of independence
often in the literature to actually tell the world what you think?"
The other thing is is that it engages one line of
research in the academic world is viewing auditing as an exercise
and constantly and pervasively persuading management to not get away with things in
the financial reporting but actually as an opportunity to develop a reputation as
a high-quality reporter and if you have this reputation as being a high-quality reporter,
you're going to get rewarded by investors in the market.
In addition to knowing and having the self-satisfaction that you've done the right thing,
you've done something well from an ethical perspective.
