ACCT609 Walden Sarbanes Oxley

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ACCT609 Walden Sarbanes Oxley Requirements and COSO Framework Discussion

Complying with sections of the Sarbanes-Oxley Act that require internal reporting of data often requires implementing additional resources. Companies generally adopt methods such as the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework to aid in fulfilling compliance requirements. Please respond to the following question: How do the requirements of the Sarbanes-Oxley Act support or contradict the principles of the COSO Framework? Provide at least three specific examples.

Your 2- to 3-page paper should reflect the application of the Resources presented this week as well as knowledge gained from previous weeks’ Required or Optional Readings.

http://www.soxlaw.com/index.htm

https://www.coso.org/Pages/default.aspxThe current issue and full text archive of this journal is available at www.emeraldinsight.com/0268-6902.htm Continuous online auditing as a response to the Sarbanes-Oxley Act El-Hussein E. El-Masry Continuous online auditing 779 Department of Accounting, College of Business and Economics, California State University, Los Angeles, California, USA, and Jacqueline L. Reck James E. Rooks Distinguished Professor in Accounting, School of Accountancy, College of Business Administration, University of South Florida, Tampa, California, USA Abstract Purpose – The purpose of this paper is to examine investors’ perceptions of the usefulness of continuous online auditing (COA) prior to and after the Sarbanes-Oxley (SOX) Act and assesses the current value relevance of continuous auditing. The paper examines two research questions: first, whether continuous online audits significantly impact investors’ perceptions of firm risk and, consequently, the value of a firm and second, whether continuous online audits have a greater impact on investor assessment of a firm’s risk subsequent to SOX. Design/methodology/approach – A 2 £ 2 £ 2 £ 2 between participants laboratory experiment was conducted. Technology risk was manipulated at (e-commerce risks versus no e-commerce risks), traditional financial risk was manipulated at (high financial leverage versus low financial leverage), COA was manipulated at (traditional annual audit versus continuous online audits), and pre- and post-SOX was tested (2002 sample versus 2005 sample). The primary dependent variables used were investors’ assessment of firm risk and investors’ assessment of earnings per share estimates. Additionally, investors’ confidence in their investing decision was captured. Findings – Results indicate a demand for COA as reflected in investors’ reduced firm risk estimates, and increased confidence in estimates. Comparative results from the 2005 sample and the 2002 sample indicate that the value relevance of COA has increased after the introduction of SOX in July 2002. We attribute this shift to investors’ perception that COA is a factor that helps mitigate firm risk and relatedly boosts investor confidence in their investing decisions. Research limitations/implications – Only a single proxy for traditional business risk (financial leverage) is examined. Future studies need to examine the ability of continuous online audits to mitigate other types of traditional business risks. Originality/value – The study establishes the current economic feasibility of continuous online audits. Additionally, the most insightful finding of the study is that the value relevance of COA has increased after the introduction of SOX. This shift is due to investors’ perceptions of COA as a factor that mitigates firm risk and helps boost confidence in their investing decisions. Implications for the profession, the classroom and public policy are discussed. Keywords Auditing, Legislation, Online reporting, Financial risk, United State of America Paper type Research paper The authors would like to thank Jim Hunton for his helpful comments and suggestions on previous drafts of this paper. The authors also extend their thanks to two anonymous reviewers and to the editorial team. Managerial Auditing Journal Vol. 23 No. 8, 2008 pp. 779-802 q Emerald Group Publishing Limited 0268-6902 DOI 10.1108/02686900810899527 MAJ 23,8 780 1. Introduction The impetus for the Sarbanes-Oxley (SOX) Act of 2002 was the large losses experienced by shareholders in cases such as Enron and WorldCom. It was believed that the passage of SOX would help mitigate some of the risk faced by shareholders. To help reduce shareholder risk, SOX enhances the traditional audit function, and tightens control over assurance service practices and processes. However, one area SOX did not address was the frequency of assurance on firm provided financial accounting information. Many studies that have addressed attempts to enhance assurance services (Vasarhelyi et al., 2002; Daigle and Lampe, 2003) conclude that the financial scandals that led to the introduction of SOX could have been avoided had a paradigm of more frequent continuous online audits been adopted. Our study addresses this proposition. Specifically, two research questions are examined. First, do continuous online audits significantly impact investors’ perceptions of firm risk and, consequently, the value of a firm? Second, do continuous online audits have a greater impact on investor assessment of a firm’s risk subsequent to SOX? A pre-post SOX study examining investors’ perceptions of the usefulness of continuous online audits was conducted. To answer our research questions we conducted a 2 £ 2 £ 2 £ 2 between participants experiment, where technology risk was manipulated (e-commerce risks versus no e-commerce risks), traditional financial risk was manipulated (high leverage versus low leverage), continuous online auditing (COA) was manipulated (traditional annual audit versus continuous online audits), and pre- and post-SOX was tested (2002 sample versus 2005 sample). The two primary dependent variables used to test the manipulations were investors’ assessment of firm risk and investors’ assessment of earnings per share (EPS) estimates. Additionally, we test for investors’ confidence in their investing decision to see if confidence is impacted by any of our manipulations. Findings of the study indicate that the current demand for COA as reflected in investors’ reduced firm risk estimates and investors’ increased confidence estimates is significant. Perhaps, the most interesting finding of the study is that the value relevance of COA increased after the introduction of SOX in July 2002. Investors now are more likely to demand continuous online audits. We attribute this shift in demand to investors’ perception of continuous auditing as a factor that mitigates firm risk and helps boost confidence in investing decisions. While we are unable to find that COA mitigates the impact of specific firm risks we test (technology and leverage), COA does impact participants’ overall assessment of firm risk. The findings have numerous implications to the profession as the market for assurance services is becoming more competitive and subject to external competition from various professions (i.e. information systems). The next section of the paper provides theory and the hypotheses. Sections on the method, results and a discussion follow the theory and hypotheses. 2. Theory and hypotheses development 2.1 Economic demand for continuous online audits One of the primary prerequisites for the success of any new service is economic demand for this service. In the case of the newly introduced COA, if investor’s favorable and value adding perception of COA can be established, then use of COA becomes economically feasible. In auditing, the independent assuror provides a service to the owners of the firm. The independent assuror’s responsibility is to certify that, to the best of his/her knowledge, and according to certain agreed upon criteria, management representations are accurate and prepared according to the agreed upon rules. Such a certification increases the reliability of management representations (Wells and Loudder, 1997); thus, increasing the credibility of the information for the owner and decreasing the risk of relying on management representations. For a new assurance service, such as COA, to be successfully introduced the owners of the firm (and potential owners) have to perceive this new assurance service as value adding. If such a perception exists, owners of the firm will demand that management acquire this new assurance service. The demand for the service is conveyed to management through the valuing of the firm. That is, those firms not providing the service will be charged a premium in the form of lower stock prices. 2.2 Using continuous online auditing to reduce investors’ risk perceptions Even prior to the introduction of SOX in July 2002, COA was thought to be effective in reducing firm risks. In the following sections a discussion of the various risks that COA helps mitigate is introduced. However, first, the definition of COA and discussion of its characteristics is addressed. 2.2.1 Basic concepts of COA. One of the most agreed upon and frequently used definitions of COA is auditing that produces audit results simultaneously with the relevant events, or a short time period thereafter (Kogan et al., 1999). These events are not necessarily related to financial statement transactions and many involve a variety of subject matters ranging from daily business transactions to long-term strategic projects that impact the long-term financial condition of the company. As the workplace and accounting systems have become more computerized[1], it has become increasingly feasible to produce a set of financial reports in narrower time frames, paving the way for the introduction of continuous reporting (Li et al., 2007). The need for timelier reporting was first documented and recommended in the report of the AICPA Special Committee on Assurance Services (1995). The report emphasized that decision-makers increasingly need more frequent (other than just at the end of the year or quarter) reporting and that decision-makers are not likely to base their decisions on unreliable (unaudited) data. Prior research (Pany and Smith, 1982; Bamber and Stratton, 1997; Blackwell et al., 1998; Wright, 2002) supports the finding that the independent auditor’s assurance increases the reliability of the financial statements. Thus, it is expected that the demand for more timely and reliable information will increase the demand for COA. In 1995, the AICPA Special Committee on Assurance Services pointed to “continuous testing” as one of the promising new services that CPA firms should consider introducing. Although the AICPA’s initiative was the first to introduce this new product, it was not the first to address the need for such a product. Groomer and Murthy (1989) studied the control and security issues in a database environment. They suggested the use of embedded audit modules that would capture information on a real-time basis. Subsequently, Vasarhelyi and Halper (1991) introduced the concept of continuous testing of real-time systems in an internal auditing context. Later studies (Kogan et al., 1999) extended this concept to external auditing and defined external Continuous online auditing 781 MAJ 23,8 782 continuous auditing as an auditing process that produces audit results to outside stakeholders a short time after, or at the same time as the occurrence of the event. It is important to note that continuous auditing (or testing) can be conducted either online or offline depending on the subject matter and on whether an internal or external audit is in question. The current study assumes that continuous audits are conducted and their results are published online. The basis for this assumption is Kogan et al. (1999), who concluded that continuous auditing can only be feasible when implemented in an online system. They argued that external as well as internal continuous audits are technologically feasible only if the process is fully automated and implemented using an online computer system, which they defined as a system permanently linking the auditor and the auditee via a computerized network. Specifically, if this permanent link is not established it will not be possible for the auditor to access the auditee’s system on a real time basis to perform the necessary audit work. Hence, for the purpose of this study, COA is defined as the type of external or internal auditing that produces audit results that are published online almost simultaneously with the occurrence of the relevant events. In light of the previous definition, some of the main differences between traditional audits and COA are the shortened time to the release of reports, the highly automated audit procedures needed to provide the required audit evidence, the significant dependence on automated systems, and the need for auditors to receive the results of the automatic audit procedures almost immediately after their occurrence[2]. Another difference between traditional audits and COA is that the internal control systems of the firm will be examined more frequently to ensure an understanding of these systems. Such increased examination has the potential to improve internal controls that are not related to financial reporting (e.g. inventory access related controls) and enhance the efficiency and effectiveness of the internal control structure in general. Since the reliability of any firm report or representation is affected by the underlying internal control system, such continuous examination of the internal control system, and its disclosure to investors has the potential to increase investors’ confidence in the data being generated. This potential to increase confidence fits with one of the primary objectives of SOX, which is to boost investor confidence. Finally, continuous audits will allow auditors to increase the magnitude of substantive tests for some transactions. Specifically, since substantive tests will be conducted on a weekly or daily basis, as opposed to once a year, it is expected that the total amount of evidence examined during the series of substantive tests will exceed the amount of evidence gathered during a traditional audit. The reason is that the total number of transactions available for testing per audit (weekly, daily, etc.) will be smaller, which permits a relatively larger percentage of testing. This increase in substantive tests can lower audit risk. Over the years, such a drop in audit risk increases investors’ confidence in the audited information (AICPA and CICA, 1999). As can be seen, there is a potential for COA to reduce investor perceptions of firm risk, which can translate into increased firm value. However, the economic feasibility of COA has not been fully researched (Vasarhelyi, 1998; Li et al., 2007). Several prior COA studies (Kogan et al., 1999; Rezaee et al., 2002; Wright, 2002) suggest that more research be directed to verify whether COA does have an economic impact on the firm. The current study looks at one aspect of the economic feasibility of COA. Specifically, this study examines whether COA, as a new assurance service, is value relevant to investors, where value relevance is defined as the ability of COA to reduce investors’ risk perceptions and increase investors’ EPS estimates. The two components of overall firm risk studied, technology related risks and traditional financial risks, are discussed in the next two sections. 2.2.2 Technology risks and COA. Electronic transactions-related risks include losses associated with any intentional attacks by hackers and attackers, or possible transmission failures during the transmission of data. Online electronic transaction risks also include the risks of dealing with the wrong party and the risks associated with the loss of trust inherent in the electronic (less personal) nature of e-commerce. Additionally, it is always feared that some of the control features provided by e-commerce vendors may not be seriously implemented. For example, there is a need to assure that claimed security and control features are seriously provided, especially for the sites of smaller firms who do not guarantee security of their online transactions. Other risks associated with electronic processing of transactions include the risks associated with inappropriate use of individual and organizational profiles, and risks of liability for links attached to the firm web-site (AICPA, 1996). Additionally, other risks that surfaced over the last decade and that need to be considered by firms include spyware and network security breaches, especially when data is transmitted by wireless devices. The previously mentioned technology risks represent threats to investors who are unable to estimate the magnitude of the cost (losses) associated with these risks. In 1996 alone, the cost of security breaches to corporations was $136 million (Hann, 1998). In 2002, the estimated cost surged to $20.2 billion (Garg, 2003). It is feared that with the increase in the volume of online retailing, from $8 billion in 1997 (Gray and Debreceny, 1998; Green, 1999) to $172 billion in 2005 and to almost $329 billion in 2010 (Lin and Yu, 2006), costs associated with the identified risk factors will also increase dramatically. Moreover, the potential liability associated with online retailing is staggering given that virtually any computer user, anywhere in the world, can access a business web-site. Thus, firms’ exposure to potential liability is considered to be global, which increases the need for some type of continuous monitoring of online transactions (i.e. COA). It has been widely accepted that risk is an important dimension of the investment decision and that investors are generally risk averse (Mear and Firth, 1988). In other words, once aware of risks, investors will incorporate the risks into their assessment of overall firm risk. The purpose of assurance services is to lessen investors’ concerns about the accuracy of management assertions; a fact documented in the statement of basic auditing concepts (AAA, 1973). The statement cites four situations where assurance services can be useful in reducing investors’ risk concerns. These situations are: the presence of a conflict of interest between the information provider and users; the significance of the consequences of information provided; the remoteness of users from the subject matter covered by the information provided; and the complexity of the subject matter. Given the frequency and the magnitude of losses associated with online transactions, the second situation (significant consequences of information) applies to firms engaged in online activities. The huge potential liability related to electronic transactions is highly significant; therefore, COA can be useful in providing reliable information so investors can more readily assess the risks associated with electronic transactions. The liability associated with online electronic transactions is particularly Continuous online auditing 783 MAJ 23,8 784 significant for online retailing, online security trading, and online procurement activities (Kogan et al., 1999). The ability of e-commerce assurance services to reduce information asymmetry and relieve investors’ risk perceptions is supported by many prior studies that have been conducted over a long period of time (Fama and Laffer, 1971; Wallace, 1980; Hunton et al., 2000). COA, however, provides a different level of service than the researched e-commerce assurances, which generally seek to assure online users that the data they are providing to the firm are secure. In a COA environment, constant up-to-date reports about the firm’s financial condition are provided. If the reports contain no negative information about the financial condition of the firm that can be associated with online electronic transactions investors’ fears about any dramatic and sudden losses that may be generated from the engagement of the firm in online activities will be lessened. More specifically, with the traditional annual audit, investors have to wait until the end of the year to get a dependable and reliable (certified by independent auditors) update about any costs or losses associated with online electronic transactions. With COA, investors get a reliable update about these costs or losses on a more frequent basis. Thus, while COA is not able to mitigate the risk associated with online transactions, it is able to provide reliable and timely information concerning risk exposure, allowing investors to make more informed decisions. Several studies (Vasarhelyi and Halper, 1991; Gray and Debreceny, 1998; Kogan et al., 1999) have addressed three areas where the use of COA can be helpful in mitigating investors’ perceptions of a firms’ e-commerce technology risks: online retailing, online procurement systems and online trading. Additionally, we argue that providing COA increases the reliability and timeliness (relevance) of firm provided information, which should reduce investors’ risk perceptions of the firm. Therefore, we provide following hypothesis stated in alternative form: H1. Investors’ assessment of investing risk associated with a firm’s e-commerce technology will be lower for firms using COA than for firms using a traditional annual audit. 2.2.3 Traditional risks and COA. In accounting, the study of traditional business risks and their impact on various accounting measures and indicators is a frequently visited research topic (Huss and Jacobs, 1991; Chen and Church, 1992; Pratt and Stice, 1994; Johnstone, 2000). In accounting research, different proxies for a firm’s business risk have been used. Some of the most widely used proxies are firm size, industry, composite measures of various firm risks, and financial leverage. Leverage, defined as total debt divided by total equity of a firm, is a traditional measure of the overall risk of the firm. Generally, the greater the debt, the greater the risk that the firm will be forced by its creditors to liquidate and go out of business (Lewis, 1993). However, leverage can also result in greater profitability since a company is generating profits from projects without having to invest any of its own funds to get that return. Moreover, interest expense proceeds are tax-deductible. Thus, the greater an entity’s financial leverage, the greater the opportunity for high returns. The risk/rewards payoff is what investors consider when analyzing the risk associated with a firm’s leverage. Many studies have documented the “superiority” of leverage as a proxy for firm risk (Hamada, 1972; Bhandari, 1988; Artz and Neihengen, 1995). Ben-zion and Shalit (1975) considered leverage one of the most relevant proxies for firm risk. Bhandari (1988) noted that the debt/equity ratio is a natural proxy for risk after he found that a firm’s debt/equity ratio is significantly associated with stock returns. Barbee et al. (1996) noted that during the period 1979-1991, studies have consistently found that leverage and the sales/price ratio have greater explanatory power for stock returns than either the book-to-market ratio or the market value of equity. Other studies (Holmes et al., 1994; Johnstone, 2000) have also used leverage as a “traditional” measure of firm risk. Palmrose (1987) and O’Keefe et al. (1994) linked leverage directly to the probability of misstatement of the financial statements. They argue that leverage also measures the prior (to the audit) likelihood of material misstatement in the financial statements. They conclude that the greater the risk of bankruptcy (due to high financial leverage), the greater the risk that management may attempt to manipulate the firm’s financial statements. Our study examines whether COA has the potential to help lessen investors’ concerns about the risk of default and the risk of material misstatement of the financial statements for highly leveraged firms. As previously pointed out, it is expected that COA could reassure the investor in a timelier manner about management activities relating to high financial leverage. COA will also reassure the investor that the risk of firm default due to high leverage is continuously reviewed by the auditors to ensure that the firm’s financial leverage does not become a going concern issue. In other words, one of the major advantages of COA over traditional annual audits is that it ensures that the firm’s traditional business risks (e.g. loan default risks) are more promptly disclosed to investors. This disclosure is valuable to investors who make investment decisions on a daily or in some cases on a minute-by-minute basis. These investors, as previously pointed out, value more timely reporting (AICPA, 1994). However, because audited information is perceived as being more reliable, investors are expected to highly value timelier audited reports. The ability of COA to impact investor risk perceptions associated with leverage is stated in the second hypothesis of this study in alternate form: H2. Investors’ assessment of investing risk associated with a firm’s financial leverage will be lower for firms receiving COA than for firms receiving a traditional annual audit. 2.2.4 Overall, relevance of COA. Based on the first and second hypotheses, we believe it is possible for COA to mitigate the impact of the identified components of firm risk. However, given the overall impact COA has on a business it is possible that a main effect for COA exists that cannot be found in the individual interactions identified. The overall demand is due to investors’ perceptions that COA reduces total firm risk, which includes risks such as technology risk and traditional business risk. In other words, an overall decrease in the riskiness attributed to firms receiving COA can occur without a significant impact being seen on the individual components of firm risk. In turn, the decrease in overall risk associated with COA will be reflected in firm value. Therefore, we hypothesize a main effect for COA, which stated in alternative form is: H3. Investors’ assessment of firms’ overall investing risk will be lower for firms receiving COA than for firms receiving traditional annual audits. Continuous online auditing 785 MAJ 23,8 786 2.3 Continuous online auditing as a response to the Sarbanes-Oxley (SOX) Act Many studies addressing the feasibility of continuous auditing (Vasarhelyi et al., 2002; Daigle and Lampe, 2003) suggested the deployment of COA as a response to the SOX Act of 2002. These studies into the effectiveness of COA and its ability to red flag discrepancies addressed the issue of whether COA could have prevented some of the financial scandals of the early twenty-first century. Vasarhelyi et al. (2002) concluded that COA could have detected many of Enron’s operational issues and red flagged them much sooner. Specifically, Enron’s abnormal transactions involving its special purpose entities would have been detected, or at least led to further investigation by the investing community if COA had been used. Daigle and Lampe (2003) concluded that SOX has increased demand for COA. Specifically, they pointed to four reasons why SOX contributed to increased COA demand: (1) the newly required certification by the CEO and CFO; (2) the new internal control requirement under section 404, which makes it mandatory for management to report on the adequacy of internal control with respect to financial reporting, and for the external auditor to certify this report; (3) the demand under sections 409 and 411 to increase the speed of reporting on substantial changes with respect to the financial condition of the companies; and (4) the new disclosures on year-end adjusting entries. Moreover, the US government in the aftermath of Enron, specifically in 2002, proposed quarterly or a more frequent type of external reporting for use by investors. Thus, COA is gaining momentum in both the accounting and regulatory communities (Searcy and Woodroof, 2003). COA can be viewed as an effective response to SOX since it is designed to be a strategic system lens audit. Strategic system lens audits focus the auditor’s assessment of risk through a lens that directs the auditor’s attention to the client’s system dynamics rather than to the traditional balance sheet accounts and the likelihood of their misstatement (Chen, 2004). This characteristic of COA fits with the SOX goal of helping prevent future financial frauds and scandals by improving audit practices and helping auditors focus more on the underlying dynamics that lead to these discrepancies and misstatements rather than on traditional balance sheet accounts risks. Thus, it is justifiable that economic demand for COA after the introduction of SOX is because of the perception that COA is effectively reducing risk. Therefore, in the fourth hypothesis of this study we state in alternate form: H4. Investors’ perception of firm risk will be lower for firms receiving COA after the introduction of SOX than for firms receiving COA prior to the introduction of SOX. 3. Method 3.1 Variables A 2 £ 2 £ 2 £ 2 between participants full factorial design experiment was conducted. The first factor, firm involvement in online retailing, a measure of new technology risks, was manipulated at two levels (involved and not involved in online retailing). For the purpose of the current study, a firm was considered “involved in online retailing” if it conducted more than 50 per cent of its retailing activity online. The second factor is firm financial leverage, which was measured as the ratio of total debt to total assets. Leverage was manipulated at two levels – high leverage (0.96) and low leverage (0.20). This division was based on the results of a study (Safieddine and Titman, 1999) that found that the average debt to equity ratio across the various industries is around 0.6. The frequency of audits (COA versus traditional annual audits) was the third factor in this study. In the experimental material, COA was defined as the “type of auditing that produces audit results simultaneously with, or a short time period after, the occurrence of relevant events”. The fourth factor was the introduction of the SOX Act in July 2002. Participants were involved in the study either prior to SOX or subsequent to the enactment of SOX. Two primary dependent variables were captured. The first dependent variable was investors’ estimate of firm risk, which was measured using a scale ranging from 0 (very low likelihood that the investor will lose his or her initial investment) to 100 (extremely risky investment). Using a rating of perception of firm risk is consistent with many studies in the accounting and auditing literature including Gooding (1975), Farrelly et al. (1985), Farrelly and Reichenstein (1984) and Mear and Firth (1988). The second dependent variable used was investors’ EPS estimates. EPS estimates, as a measure of firm risk, are frequently used in accounting and auditing research (Mear and Firth, 1988, Hunton et al., 2000). An additional dependent variable was investors’ confidence in their investing decision. Participants rated their confidence in their investing decision on a scale ranging from 0 (very unconfident) to 100 (very confident). Information was also gathered for several covariates: the number of years of work experience, age of participants, and years of investing experience. Because these covariates have been used in similar studies on financial analysts and individual investors’ earnings forecasts (Hunton and McEwen, 1997; Hunton et al., 2000), we ensured these factors were tested, and controlled if necessary, in our study. 3.2 Experiment[3] The experiment was conduced in a monitored laboratory setting. Students were randomly assigned to a treatment and provided with a paper version of the experiment. Participants first read background information about a hypothetical company. This information included economic information followed by industry information, two years of dividends and share price information, and a three-year summary of key financial ratios. After receiving background information, current year summary information was provided in the form of three key ratios. The ratios provided were leverage, current ratio and return on equity. Leverage was the only ratio manipulated (high ¼ 0.96 and low ¼ 0.20). A moderate current ratio of 2.0 (Horngren et al., 1999) and a moderate return on equity ratio of 14 per cent (Eaker et al., 2000) were provided. For the online retailing activities treatment, participants received either a paragraph about technology risks associated with involvement in online retailing activities or a paragraph about the traditional retailing activities of the case firm (Appendix 1). Participants in the continuous audits (COA) treatment group received a paragraph disclosing management’s intention to submit to continuous (weekly) online audits in the coming year; whereas, the traditional audits group read a paragraph indicating that the company’s financial statements were audited once a year (Appendix 1). Continuous online auditing 787 MAJ 23,8 788 After reading the experimental materials, participants rated the perceived risk of the firm and estimated its EPS for the current year. They also rated their confidence in their investing decision. After returning the experimental instrument, participants received a post-experimental questionnaire that included demographic questions and manipulation checks. At the end of the experimental session, participants were debriefed. The first experimental session was conducted in June and July 2002, prior to the introduction of SOX. The second experimental session was conducted in November 2005[4]. 3.3 The model First, using the following model a multivariate analysis of variance (MANOVA) was conducted to test for the overall significance of the model and independent variables: Y ¼ a þ b1 E-commerce risk þ b2 Traditional financial risk þ b3 COA þ b4 SOX þ b5 E-commerce risk £ COA þ b6 Traditional financial risk £ COA þ b7 COA £ SOX þ 1; where Y ¼ a vector of dependent variables representing: investors’ assessment of firm risk (Risk) ¼ a percentage assessment, where 0 is “extremely safe investment” and 100 is “extremely risky investment”. Investors’ EPS estimates ¼ EPS projection for the case company. Investors’ confidence in EPS estimates (Confidence) ¼ a percentage assessment, where 0 is “very unconfident” and 100 is “very confident”. E-commerce risk ¼ 1, if the firm is involved in e-commerce and 0, if not. Traditional financial risk ¼ 1, if the firm has high leverage and 0, if leverage is low. COA ¼ 1, if the firm submits to COA and 0, if the audit is annual. SOX ¼ 1 for the post-SOX period and 0 for the period preceding the introduction of SOX. The interaction term e-commerce risk £ COA is used to test H1, and the interaction term traditional financial risk £ COA is used to test H2. The main effect COA is used to test H3, and the interaction term COA £ SOX is used to test H4. 4. Results 4.1 Participants demographics There were 56 participants in the pre-SOX portion of the experiment, which was conducted in June and July 2002. Participants were graduate MBA students enrolled in an investment class at a large southeastern US university. On average, participants were 28 years of age, had 6.1 years of work experience, and 3.1 years of investing experience (Table I). Sixteen of the participants were female and 40 were male. Class extra credit, in addition to the opportunity to win one of two $30 prizes were the incentives offered to participants. Information about the financial and non-financial Variable Table I. Participants’ demographics Age Investing experience Work experience N Minimum Maximum Mean SD 129 132 132 20.00 0.00 0.00 46.00 20.00 25.00 28.779 2.163 6.220 5.106 3.364 4.939 incentives was conveyed verbally as well as on the informed consent form. The 82 participants in the post-SOX portion of the experiment, which was conducted in November 2005, were recruited at a large western US university. Again, participants were graduate MBA students enrolled in an investment class. They were an average of 29.5 years of age, had 6.3 years of work experience, and 1.5 years of investing experience. Forty-two of the participants were female, 35 were male and five chose not to reveal their gender. As in the pre-SOX treatment, class extra credit and the opportunity to win one of two $50 prizes were the incentives offered to participants. Information about the financial and non-financial incentives was conveyed verbally as well as on the informed consent form. 4.2 Manipulation checks The first manipulation check tested whether the participants who received the e-commerce risk case noticed and identified these risks while performing the task. The statement was worded as follows: “During the experimental session, information was provided about the firm’s involvement in online retailing activities and the risks associated with that.” On a seven-point Likert type scale, 1 was “strongly disagree” and 7 was “strongly agree”, the mean for the group receiving the e-commerce manipulation was 5.7, and for the group receiving the no e-commerce manipulation it was 4.0. The difference between the mean rating for the e-commerce group and the no e-commerce group was highly significant ( p , 0.01). The second manipulation check tested whether participants who received the high leverage manipulation noticed and identified the risks associated with high leverage. The statement was worded as follows: “During the experimental session, information was provided about the case company that conveyed a high leverage ratio for the firm.” On a seven-point Likert type scale, where 1 was “strongly disagree,” and 7 was “strongly agree”, the mean for the group receiving the high leverage manipulation was 4.7 and for the group receiving the low leverage manipulation it was 3.4. The difference in means was highly significant ( p , 0.01). The third manipulation check tested whether participants who received the COA manipulation recognized it. On a seven-point Likert type scale, where 1 was “strongly disagree” and 7 was “strongly agree,” the mean for the group receiving the COA manipulation was 6.1, while the mean for the group receiving the traditional audit manipulation was 3.5. The difference between the mean ratings was highly significant ( p , 0.01). The fourth, fifth and sixth statements tested participants’ awareness of the task, the investing decisions they made, and of the dependent variables they assessed. For all three statements a seven-point Likert type scale was used where 1 was “strongly disagree” and 7 was “strongly agree.” The fourth statement was worded as follows: “During the experimental session, I was asked to rate my perception of firm’s overall investing risk.” When compared to the scale midpoint of 4.0 (somewhat agree), the group mean rating of 5.3 was significantly ( p , 0.01) greater. The fifth statement was worded as follows: “During the experimental session, I was asked to rate my confidence about my estimate of firm’s overall investing risk,” For this statement the group mean of 4.5 was significantly ( p ¼ 0.015) greater than the scale midpoint. The sixth statement was worded as follows: “During the experimental session, I was asked to estimate XYZ company year 2002/2005 EPS.” Again, the group mean of 6.2 was significantly different ( p , 0.01) from the scale midpoint. Combined, these results Continuous online auditing 789 MAJ 23,8 790 confirm that participants were diligent in performing the task in hand, analyzing the ratios presented and providing the required estimates. 4.3 Descriptive statistics An examination of the descriptive statistics (Table II, panel A) indicates that mean Risk estimates are higher in groups with the traditional audit manipulation (50.5 per cent) than in groups receiving the COA manipulation (39.6 per cent). These results support our expectation that COA reduces investor risk perceptions. The mean Risk assessments for the high e-commerce manipulations are somewhat higher than the mean Risk assessments for the low e-commerce manipulation. Results also indicate that the Risk assessment tends to be higher in the high financial leverage manipulation than in the low financial leverage manipulation. Finally, consistent with the prediction that COA will be associated with lower risk assessments post-SOX, we find that the average Risk in the post-SOX period is 38.2 per cent compared to 41.9 per cent in the pre-SOX period for the COA manipulation. However, comparing EPS group means (Table II, panel B) seems to indicate only small differences in the EPS estimates among the manipulations. An examination of the descriptive statistics indicates that mean EPS estimates are higher in groups with the COA manipulation (1.546) than in groups receiving the traditional audits manipulation (1.531). These results are somewhat supportive of our expectation that COA reduces investor risk perceptions as reflected in higher EPS estimates. Contrary to expectations, high e-commerce risk firms generally have slightly higher EPS estimates than do low e-commerce risk firms. The mean EPS assessments for the low financial leverage manipulations appear to be somewhat higher than the mean EPS assessments for the high financial leverage manipulation, indicating that lower financial risk results in somewhat higher EPS. An examination of the descriptive statistics on Confidence (Table II, panel C) indicates that mean Confidence estimates are higher in the groups receiving the COA manipulation (69.4 per cent) than in groups receiving the traditional audits manipulation (62.8 per cent). Confidence is also higher in the post-SOX treatments than in the pre-SOX treatments. Particularly within the COA manipulations, it is observed that Confidence has a mean of 60.4 per cent in the pre-SOX COA treatments and a mean of 80.8 per cent in the post-SOX COA treatments. These results indicate that COA and SOX help boost investors’ confidence in their decision to invest in a certain company. 4.4 Hypotheses testing A MANOVA (described earlier) (Table III) was conducted to test the statistical significance of treatments with respect to the dependent variables investors’ perception of firm risk (Risk), investors’ EPS estimates, and investors’ confidence in their EPS decision (Confidence). MANOVA results were not significant for the interaction effects, but several main effects (COA and SOX) were significant at an a of 0.10. Thus, analysis of variance (ANOVA) was conducted for each of the three dependent variables. As a sensitivity test, a MANCOVA was conducted with investing experience as the covariate. MANCOVA results (not tabulated) were substantially the same as the MANOVA results. Submission to continuous auditing was significant ( p ¼ 0.039) and introduction of SOX was highly significant ( p ¼ 0.00). Both MANOVA and Panel A: mean and (SD) for the dependent variable, Risk COA 478 (0.213) 443 (0.262) 466 (0.242) Traditional audit 0.583 (0.258) 0.341 (0.143) 0.471 (0.168) Main effect 0.527 (0.231) 0.392 (0.210) 0.469 (0.198) Panel B: mean and (SD) for the dependent variable, EPS COA 1.603 (0.180) 1.547 (0.031) 1.551 (0.008) Traditional audit 1.532 (0.027) 1.493 (0.131) 1.535 (0.045) Main effect 1.570 (0.133) 1.520 (0.096) 1.543 (0.032) Panel C: mean and (SD) for the dependent variable, Confidence COA 0.585 (0.229) 0.429 (0.266) 0.683 (0.147) Traditional audit 0.700 (0.164) 0.343 (0.390) 0.570 (0.262) Main effect 0.639 (0.202) 0.386 (0.324) 0.627 (0.211) 0.694 (0.213) 0.628 (0.267) 0.662 (0.241) 0.858 (0.074) 0.763 (0.189) 0.820 (0.132) 0.818 (0.158) 0.675 (0.141) 0.740 (0.159) 0.717 (0.113) 0.693 (0.205) 0.704 (0.167) 1.546 (0.099) 1.531 (0.076) 1.539 (0.089) 1.548 (0.065) 1.575 (0.102) 1.560 (0.082) 1.580 (0.055) 1.536 (0.039) 1.55 (0.050) 1.530 (0.032) 1.533 (0.039) 1.532 (0.034) 0.750 (0.200) 0.683 (0.202) 0.725 (0.189) 1.516 (0.164) 1.521 (0.021) 1.518 (0.129) 0.805 (0.067) 0.720 (0.297) 0.766 (0.199) 1.527 (0.063) 1.520 (0.128) 1.525 (0.088) 0.386 (0.243) 0.517 (0.295) 0.440 (0.267) 0.396 (0.213) 0.505 (0.237) 0.447 (0.230) 0.398 (0.221) 0.620 (0.184) 0.479 (0.230) 0.298 (0.115) 0.475 (0.185) 0.376 (0.171) 444 (0.149) 0.614 (0.228) 0.537 (0.210) Main effect Post-SOX mean (SD) High leverage mean (SD) Low leverage mean (SD) High e-risk Low e-risk High e-risk Low e-risk 288 (0.256) 0.364 (0.283) 0.329 (0.263) Pre-SOX mean (SD) High leverage mean (SD) Low leverage mean (SD) High e-risk Low e-risk High e-risk Low e-risk Continuous online auditing 791 Table II. Descriptive statistics by treatment group for the dependent variable measures MAJ 23,8 792 MANCOVA models were initially run as full models with all two-way and three-way interaction terms, in addition to main effect terms. None of the three-way interaction terms were significant ( p ¼ 0.10.) The three-way interaction terms were dropped from the model and the model was rerun with the main effect terms and the hypothesized two-way interaction terms. ANOVA results for the dependent variable, Risk, (Table IV) show significant main effects for e-commerce ( p ¼ 0.03) and traditional risks ( p ¼ 0.033). This is not unexpected given that these variables represent components of the dependent variable, overall assessment of the riskiness of the firm. The significance of the COA main effect (one-sided p-value ¼ 0.009), seemingly provides support for H3; however, with a significant COA and SOX interaction the main effect is difficult to interpret. The interaction between e-commerce risks and COA is not significant, nor is the interaction of traditional risks and COA, providing no support for H1 and H2. However, there is a significant (one-sided p ¼ 0.029) interaction between COA and SOX, providing support for H4[5]. As indicated by the means, and Figure 1, SOX had a significant impact on participants’ assessment of risk and COA’s ability to mitigate risk. A look at the distribution of the means for the four groups involved in the interaction shows that COA was always successful in reducing the perception of company risk. Prior to the introduction of SOX (2002 sample) average Risk for the COA treatment was 41.9 per cent and the average Risk for the traditional audits treatment was 44.0 per cent. After the introduction of SOX (2005 sample) the average Risk for the COA treatment was 38.2 per cent and for the traditional audits treatment it was 55.7 per cent. The fact that the presence of COA resulted in consistently lower mean risk assessments, regardless of the SOX treatment, lends some support to H3. The ANOVA model for the EPS dependent variable is not significant ( p ¼ 0.64) (Table V), indicating that the independent variables are not useful in predicting EPS estimates made by participants. An analysis of the individual variables supports the model finding, in that none of the independent variables is significant at an a of 0.10. Thus, for EPS estimates none of the hypotheses is supported. These results indicate that while COA and SOX were able to affect participants’ perceptions of firm riskiness, the change in perception of risk did not translate into significantly different EPS estimates. As a sensitivity analysis, an ANCOVA model for EPS was produced with investor’s experience as a covariate. Model’s results were not significant ( p ¼ 0.61). As an additional test of how COA and SOX affect investor perceptions, we conducted an ANOVA using Confidence as the dependent variable. Our results Source Table III. Multivariate analysis of variance Intercept E-commerce risks Traditional risks COA SOX E-commerce risks £ COA Traditional risks £ COA COA £ SOX Value F-statistic Hypotheses df Error df p-value 489.088 0.055 0.081 0.084 0.152 0.003 0.014 0.028 12716.285 1.434 2.097 2.189 3.944 0.078 0.359 0.725 3.000 3.000 3.000 3.000 3.000 3.000 3.000 3.000 78.000 78.000 78.000 78.000 78.000 78.000 78.000 78.000 0.000 0.239 0.107 0.048 0.011 0.486 0.391 0.270 Source Type III sum of squares df Mean square F-statistic p-value 1.087 25.192 0.227 0.220 0.268 0.047 0.000 0.000 0.174 5.925 33.603 7.012 7 1 1 1 1 1 1 1 1 125 133 132 0.155 25.192 0.227 0.220 0.268 0.047 0.000 0.000 0.174 0.047 3.276 531.515 4.797 4.640 5.653 0.983 0.004 0.000 3.670 0.003 0.000 0.03 0.033 0.009 0.323 0.475 0.497 0.029 Corrected model Intercept E-commerce risks Traditional risks COA SOX E-commerce risks £ COA Traditional risks £ COA COA £ SOX Error Total Corrected total Continuous online auditing 793 Table IV. ANOVA tests for Risk Notes: R 2 ¼ 0.155; adjusted R 2 ¼ 0.108 sox 0.55 0.00 1.00 Dot/Lines show Means Risk 0.50 0.45 0.40 Figure 1. Multiplicative effect of COA by SOX on firm risk estimates 1.00 0.00 coa Source Corrected model Intercept E-commerce risks Traditional risks COA SOX E-commerce risks £ COA Traditional risks £ COA COA £ SOX Error Total Corrected total Type III sum of squares df Mean square F-statistic p-value 0.041 292.671 0 0.005 0.009 0.000 0.011 0.007 0.011 0.954 306.131 0.994 7 1 1 1 1 1 1 1 1 121 129 128 0.006 292.671 0 0.005 0.009 0.000 0.011 0.007 0.011 0.008 0.734 37122.798 0.001 0.629 1.160 0.054 1.391 0.905 1.419 0.643 0.000 0.980 0.429 0.142 0.817 0.120 0.171 0.118 Notes: R 2 ¼ 0.041; adjusted R 2 ¼ 2 0.015 Table V. ANOVA tests for EPS MAJ 23,8 794 (Table VI) indicated a marginally significant (one-sided p ¼ 0.08) COA main effect. The mean Confidence estimate for participants in the traditional audit groups was 62.7 per cent; whereas the mean Confidence estimate for participants in the COA groups was 69.4 per cent. This finding is consistent with the finding of participants’ perception of firm riskiness (Risk). Additionally, we find a significant main effect for SOX. In the pre-SOX period, participant Confidence averaged 58.9 per cent, while in the post-SOX period Confidence averaged 76.3 per cent. This finding is consistent with the goals and objectives of SOX which are boosting investors’ confidence in their investing decisions. However, none of the interaction terms were significant. Thus, COA did not interact with e-commerce, traditional risk or SOX to influence participant Confidence. 5. Discussion The results of the study confirm that COA can positively impact investor perceptions of firm risk and investor confidence in their investing decisions. The major findings of the study are summarized in the discussion that follows. First, the current overall value relevance of COA is reflected in investors’ reduced firm risk perceptions and in the increase in investors’ confidence in EPS estimates. Although COA was not able to significantly impact participants’ EPS estimates, a larger sample with more experienced participants could lead to different results since most of the current differences in group means are in the expected direction. Second, and arguably the most insightful finding of the study is that the value relevance of COA has increased after the introduction of SOX in July 2002. Investors now are more likely to demand the deployment of COA. This shift is due to investors’ perceptions of COA as a factor that mitigates firm risk and helps boost confidence in their investing decisions. Results of the study have various implications for the profession, the classroom and public policy. First, the profession should start implementing COA on a commercial non-experimental basis[6] and take advantage of the increased momentum for continuous auditing, as evidenced by this study, to promote it as part of the response of the profession to SOX. These attempts are needed more now than at anytime in the Source Table VI. ANOVA tests for Confidence Corrected model Intercept E-commerce risks Traditional risks COA SOX E-commerce risks £ COA Traditional risks £ COA COA £ SOX Error Total Corrected total Type III sum of squares df Mean square F-statistic p-value 1.206 40.284 0.057 0.303 0.094 0.604 0.003 0.003 0.032 4.092 45.663 5.297 7 1 1 1 1 1 1 1 1 84 92 91 0.172 40.284 0.057 0.303 0.094 0.604 0.003 0.003 0.032 0.049 3.536 827.001 1.173 6.212 1.930 12.405 0.066 0.060 0.659 0.002 0.000 0.282 0.015 0.084 0.001 0.396 0.403 0.209 Notes: R 2 ¼ 0.228; adjusted R 2 ¼ 0.163 past since there has been an increased interest from other professions (especially information systems professionals) in providing assurance services that have traditionally been our province. Such interest is clearly evidenced by an increased number of information systems majors seeking IS auditing certification (e.g. ISACA certification) and the relaxation of the number of accounting and auditing classes required for an IS auditor designation and certification. Such a trend could certainly lead to the loss of this potentially strategic product and market niche to other professions, mainly information systems. Many lessons can be learned from the web-trust experience and the loss of this strategic market for web assurance services to other providers from outside the profession (e.g. VeriSign and Entrust). First, awareness among CPAs of the importance of capturing the market for continuous auditing and the detrimental consequences to the profession if these services are offered by assurance entities from outside the profession need to be emphasized. Second, training interested members of the AICPA on how to develop and establish continuous auditing programs is an effort that needs to be undertaken in the near future. Third, for large size companies wishing to develop their own continuous auditing packages, guidance on how to develop the embedded audit modules is needed. CPA firms can play an important role in providing such guidance to the internal auditors of the company. Specifically, developing the list of red flags constituting the rules for the exception reports generated by the embedded audit modules using audit software (e.g. ACL) or using the Enterprise Resource Planning system of the company (Debreceny et al., 2005) will require substantial training, which CPA firms could provide. 6. Conclusion The current study indicates the presence of a significant demand on COA as reflected in investors’ reduced firm risk estimates, and increased confidence in estimates. Additionally, the increased value relevance of COA following the introduction of SOX suggests that it is perceived by investors as a response to the act. Future research needs to explore the underlying reason(s) for the increase in the demand on COA (e.g. financial business risks, e-commerce risks, global economy risks, etc.). Even though, in the current study, no single underlying factor was found responsible for the increased demand on COA, this finding could be due simply to a lack of statistical power since many univariate differences between group means were in the expected direction. Additionally, future research needs to examine the applicability of the findings about the value relevance of COA to other financial markets outside the US where audit opinion may be perceived less or more reliable. Notes 1. XML and its equivalent XBRL are being introduced and implemented. Additionally, the internet has become a cheap, and readily available means of communication, substituting for traditional electronic data interchange. 2. This assumes that an evergreen audit report is used and gets modified based on the results of the continuous audits. 3. Twenty-six students were recruited at a large southeastern US university for a pilot study. The students were MBA students enrolled in an investment class. The results of the pilot study confirmed the effectiveness of the manipulations and caused the researchers to change Continuous online auditing 795 MAJ 23,8 796 some of the wording of the experimental task. Additionally, the pilot study helped confirm the clarity and realism of the task. 4. To avoid any learning effects, two groups of participants from two different universities were used in the two sessions. Participants’ demographics, however, were very comparable as discussed in the results section. 5. As a sensitivity test, an ANCOVA with investing experience as a covariate was conducted, providing results substantially the same as those included on Table IV. 6. Evidence from surveys conducted by PWC and IIA suggest that demand for continuous auditing among executives has been on the rise. However, only 3 per cent of executives advocating the implementation of continuous auditing have fully automated continuous auditing processes in place (PWC, 2006). References AAA (American Accounting Association) (1973), “A statement of basic auditing concepts”, The AAA Committee on Basic Auditing Concepts, AAA, Sarasota, FL. AICPA (1994), AICPA Report on Financial Reporting (The Jenkins Committee), AICPA. AICPA (1995), Interim Report. Special Committee on Assurance Services, AICPA. AICPA (1996), Report of Electronic Commerce Assurance Services Committee, AICPA. AICPA and CICA (1999), Continuous Auditing: Research Report, Canadian Institute of Chartered Accountants, Ontario. 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El-Masry can be contacted at: eelmasr@calstatela.edu To purchase reprints of this article please e-mail: reprints@emeraldinsight.com Or visit our web site for further details: www.emeraldinsight.com/reprints Appendix 1 Experimental Instrument The high leverage-online retailing risk-continuous auditing scenario Please carefully read the following information about XYZ Corporation. After you read the information, you will be asked to make decisions based on the information you read: I. Background Information XYZ Corporation operates in the southwest and southeast. XYZ is a diversified company. It is involved in retailing, information technology and manufacturing industries. These different industries –retailing, information technology, and manufacturing- are associated with various levels of competition. In the retail industry, as well as in the information technology industry, the company faces competition from both local and national merchants. Since the company’s operations are divided among three industries with three levels of risk, the company’s overall industry risk is considered average. III. Dividends and share price information Share price 2003 Dividends per share 2004 IV. Three-year summary 2002 2003 2004 $37,762,778 $36,610,064 5,163,729 5,135,259 5,258,325 1.55 1.54 1.55 Income Statement Data: Net sales $38,676,711 Net income Diluted earnings per common share V. Current year (2005) information Current Ratio 2 Leverage (Debt/Assets) 0.96 Return on Equity 14% Please read the following information carefully. This information was obtained from the footnotes to the financial statements of XY Z at the end of the fiscal year 2004 (continued) Continuous online auditing 799 MAJ 23,8 800 E-Commerce activities XYZ has been engaged in e-commerce activities. It conducts more than 50% of its retailing activity online. XYZ’s engagement in online retailing activities subjects the company to numerous risks. Risks include those associated with possible intentional attacks, transmission failures, lack of authentication, loss of trust, theft of identity, inappropriate use of organizational and individual profiles, and liability for links attached to the corporate Website. They also include the risks of entering new distribution channels, including unanticipated operating problems, lack of e-commerce related experience and customer acceptance and significant competition from existing and new retailers. In addition, the use of the Internet to sell goods and services has developed only recently, and there can be no assurance that a sufficiently large number of consumers will remain using the Internet as a medium of commerce. There can be no assurance that the Company’s online retailing activities will achieve sales and profitability levels that justify the Company’s investment therein. Expansion of any of the previously mentioned concepts or any other related concepts, and the entry into any new distribution channels also involve other risks that could have a material adverse effect on the Company, including diversion of management’s attention from the Company’s traditional sale and distribution channels, difficulties with the hiring, retention and training of key personnel, risks associated with higher dependence on holiday season sales, lower gross margin, and risks associated with unanticipated problems or legal liabilities. Please read the following information carefully. This information was obtained from the footnotes to the financial statements of XY Z at the end of the fiscal year 2004 Continuous Audits XYZ Corporation plans to contract for more frequent audits (continuous online audits) of its financial position. The audits will be conducted electronically by an independent CPA firm on a weekly basis (instead of the single annual audit) and the audit reports will be disclosed online, a short period after the issuance of the report. Continuous online audits will allow a more frequent review of the firm’s financial condition, which is thought to be useful to both investors and management. Continuous online audits will allow investors to know about any changes in the financial condition of the firm in a more timely fashion. Specifically, continuous online audits will allow the auditor to perform more frequent checks on the internal controls of the firm. In addition, it is expected that with continuous online audits, the magnitude of the aggregate substantive tests (for all the audits conducted throughout the year) will increase. Based on the previously provided information about XYZ Inc., Please answer the following questions: On a scale of 0 (very low likelihood that the investor will lose his or her initial investment) to 100 (extremely risky investment), how would you rate XYZ’s business risk. __________ My estimate of XYZ’s earnings per share for the year 2005 is__________ On a scale 0 (very unconfident) to 100 (very confident), how would you rate your confidence in the earnings per share estimate you just provided? _________ Continuous online auditing Appendix 2 Post Experimental Questionnaire Please answer all of the following questions by placing an “X” anywhere on the line: 1) During the experimental session, information was provided about company’s involvement in online retailing activities and about the risks associated with that. I I I I I I I 1 2 3 4 5 6 7 Strongly Unsure Strongly disagree agree 2) During the experimental session, information was provided about the intention of the firm to submit to continuous (more frequent) audits. I I I I I I I 1 2 3 4 5 6 7 Strongly Unsure Strongly disagree agree 3) During the experimental session, information provided about XYZ corporation conveyed a high leverage ratio for the firm. I I I I I I I 1 2 3 4 5 6 7 Strongly Unsure Strongly disagree agree 4) In the experimental session I was asked to rate my perception of firm’s overall risk. I I I I I I I 1 2 3 4 5 6 7 Strongly Unsure Strongly disagree agree 5) During the experimental session, I was asked to rate my confidence about my estimate of firm’s overall risk. I I I I I I 1 Strongly disagree 2 3 4 Unsure 5 6 I 7 Strongly agree 6) In the experimental session, I was asked to estimate XYZ’s year 2005 earnings per share. I I I I I I I 1 Strongly disagree 2 3 4 Unsure 5 6 7 Strongly agree (continued) 801 MAJ 23,8 7) To what extent did the possibility of winning the $50 prize motivate you to do your best answering the questions about XYZ corporation. I 802 I I 1 2 Did not motivate me at all 3 I I 4 5 Somewhat motivated me I 6 8) Please fill in the appropriate boxes below: _____ Male ______ Female _____ Age ______ Number of years of work experience ______ Number of years of investing experience I 7 Greatly motivated me Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

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