MEANING
A Niche or A Necessity For Audit Judgement
George Mickhail
Department of Accounting and Finance
University of Wollongong
NSW 2522 - Australia
Email: george@uow.edu.au
* I appreciate the support of Weerona College, University of Wollongong where I was in residence
during work on this paper. I also thank my supervisors Professor Michael Gaffikin and Professor Ronald
Stamper for their valuable ideas, support and debate over the years, Professor Tony Tinker for his
valuable discussions that have illuminated my understanding of the social paradigm and finally my
gratitude is due to my partner Lissa Cheng for her unconditional love, sacrifice and support throughout
the writing of this paper.
Abstract
This paper attempts to provide an approach to understand, not just describe, the judgement process in
auditing. It will make some general criticisms of currently established judgement methods from the view
point that without an adequate understanding of underlying social interactions, efforts oriented towards
judgement formulation will continue to be unrewarding. It will present an alternative judgement
strategy capable of simplifying the interface between the auditor and the social system on the basis of a
richer cognitive approach. One aspect of this approach will be applied to an example and its specific
human factors aspect will be discussed. Finally, I shall sum up with some conclusions and some further
research suggestions.
Introduction
Audit Judgement - A Major Concern
Studies of audit judgement as Boritz (1986,p.335) notes, "are a major focus of auditing research
due to their potential policy implications for enhancements to professional practice in areas such as
development and modifications of auditing methods, standards, and procedures, approaches to training
and supervision, and creation of computer-assisted decision aids".
From the technical perspective (Mock et al,1989), there are basically three areas of concern with
respect to audit judgement - philosophical, statistical, and methodological. The philosophical issues
involves questions about introspection and the nature of the data. The statistical considerations include
the difficulties associated with measurement, sampling, experimental design and inference. And,
methodological concerns include the effect of methods used on the judgement process and consequently
on the value of the results obtained.
I will use my own interdiscipline, Systems Research, as my springboard. But before I take the leap
I would like to emphasize that my concern is not with what systems research is, but rather with what we
can make of it in the methodological perspective of audit judgement. The central problem of audit
judgement methodologies is to establish the relationship between auditing methods and the world of the
accounting system in which these methods are used. The accountant is concerned with the syntactic
problem of making the accounting system correct and efficient in operation. He is not concerned with
the meaning of the accounting system, but the auditor has the semantic problems as his key
responsibility. If audit methods and the accounting system do not relate correctly it will be the auditor’s
fault.
Discussion
Preoccupation With Partial Understanding
Current behavioral auditing research methodologies are known to provide a partial
understanding of audit judgement. The reason for this "partial understanding" is principally the level at
which current methodologies tackle the study of audit judgement. Most of the current behavioral
auditing research considers the cognitive process of judgement as central to their methods. Methods that
are based on the Psychology literature of cognition, emphasizing judgement in isolation from the
development of its underlying processes.
Choo (1989), presents us with a social cognition concept called the "Script" claiming that "the
recalled decision script is associated with some structured expectations not only about the appropriate
decision process, but also about the likely subsequent events resulting from the decision".
While, Shanteau (1989), concludes his investigation of cognitive heuristics and biases in
behavioral auditing, arguing that "although the concept of judgemental heuristics seems compelling, the
connection between representativeness (or other heuristics) and specific errors has yet to be firmly
established. Therefore, the status of judgemental heuristics is problematic". As for biases, Schwartz &
Griffin (1986), conclude that it is not clear which factors determine when biases will appear in expert
medical judgement. Shanteau (1989), notes that there is a growing debate on the question of whether
appropriate normative standards have been used to define biases. Because if the definition of the
normative standard is uncertain, then the identification of a "bias" is equally uncertain. For example, the
definition of base rate, depends on the population from which the sample is drawn -a given sample
might have come from many populations (Cohen,1981).
Beach et al. (1989), argues that decisions are primarily about: (i) adopting or rejecting goals and
the plans to attain accepted goals, and (ii) whether those plans are making enough progress toward goal
achievement to warrant their continued implementation. According to Beach et al. (1989), these two
types are called "adoption" and "progress" decisions respectively. In presenting (Beach et al., 1989), an
Image Theory interpretation of audit decision making based upon analysis by Waller & Felix (1984) and
Felix & Kinney (1982), they concluded that "in image theory view, the error decision is a consequence of
the inability of the audit process to sufficiently remove doubt about material error rather than a
consequence of proving that there is such an error".
It is obvious extremely important for the critical endeavour to specify correctly the assumptions of
the above discussed approaches - I shall not pursue it here because it does not strike at the core of the
argument. These methodologies deal with audit judgement as though it were a dispersed set of
components, e.g., decisions, decision-makers, decision processes, etc. Insofar, as they deal with these
components, they are unable to say very much about what their relationships to one another refer to.
In the example based upon the payroll system problem, the flowchart solution (see the
appendices), reveals a concern solely with the procedural level of the system. The processes of recording,
collecting, checking, approving and initialling the time cards are al concerned with the bureaucracy
overlaid upon it. This reflects the method’s concern with procedures processing rather than business
requirements. Te method fails to address the business aspect of the problem and concentrates the analysis
at the procedural level of the bureaucratic system. Such an approach does not permit the substantive
business problem -of how to let the employee fill in their worked hours- to be expressed and tackled,
except in terms of the procedural detail of the chosen solution.
Perceiving every information system as a message system (Backhouse,1988) overlooks another
vital component in human interaction: the use of communication ‘speech’ acts. In the exchange between
an employee of the company and the company itself (through the agency of a foreman), there are a
number of these communication acts by which the changing state of mutual social obligations and
expectations is achieved:
* Request (Employee to fill in his own time card)
* Identify (Foreman collects his own departmental time cards)
* Approve (Foreman initials complete and accurate time cards)
These social constructs form the backbone of a purposeful social behavior upon which we may
develop message systems (Backhouse,1988). The forms of the messages may differ, their mode of delivery
(manual, automated, etc.) may change, but the meaning of them must remain fixed (Backhouse,1988),
or else uncertainty and confusion will prevail. Whilst individual auditors might be aware of this problem
(meaning) and tries to resolve it, current methods of analysis do not handle this fundamental aspect of
information systems.
The MEASUR method (Stamper et al.,1988) provides an insight to this problem and has as one of
its tools Conversation Analysis, which emphasizes the communication of intentions, while other tools
include, Collateral Analysis, Evaluation Framing, and Functional Subsystems Analysis. The use of this
methodology with its various tools aims initially at relating the formal systems (Accounting and
Auditing) we intend to tackle to the informal world of social behavior. The deployment of which will lay
down the foundations to understanding their relationship to one another.
Audit Judgement - A Systems Perspective
Audit Judgement As A System
The term ‘System’ (Ackoff,1960), is used to cover a wide range of phenomena. It may include, for
example, number systems, accounting systems, auditing systems, philosophical systems, control systems,
educational systems, information systems, and communication systems. Some of these are conceptual and
others are physical entities. Ackoff (1960), defines a system as "any entity, conceptual or physical, which
consists of interdependent parts". In systems research our sole interest is in the ones that displays
behavior. This leads to conclude (Ackoff,1960) that, systems research is only concerned with behavioral
systems which are subject to control by human beings. These systems consists of parts each of which
displays behavior too. Ackoff (1960), takes it further and defines behavioral systems as "a conceptual
construct as well as a physical entity, since such a system may or may not be treated as a system,
depending on the way it is conceptualised by the person treating it."
I would like to consider the following proposition so as to explain audit judgement:
"It is to establish a understanding of the relationship between the Auditing system and the
world of the Accounting system in which it is used."
By adopting the above proposition with reference to systems research as was earlier outlined, I
would like to treat audit judgement as a behavioral system, where the outcome of its behavior is
conceptualised as the product of the interactions of its parts.
The audit judgement system as outlined in figure (1), is composed of the following parts: (a) the world
of the accounting system being examined; (b) the auditing system; (c) the relationship between the
auditing system and the world of the accounting in which it is used; and (d) the understanding of the
relationship between the auditing system and the world of the accounting system in which it is used. The
outcome of this system’s behavior which is "Audit Judgement", is a product of the interactions of its
parts (a-d).
Audit Judgement As A Business System
We can view a Business system (fig.2), according to Backhouse (1988) conception of an
information system, as a series of steps leading from the physical level towards the business level. At the
business level, commitments are made and obligations entered into by the contracting parties. While at
the physical level, transactions are made and devices are used to account for them. We find that in
between those two levels (Stamper,1973), a distinction is being made between the codes; their structure
and usage; their meaning; and their perception that influence human behavior. If we adopt this view to
account for the dynamics of the audit judgement system, we will find that: (a) the accounting and
auditing systems tend to focus on the lower end of the staircase, representing the codes of the business
system; (b) the relationship between the auditing system and the world of the accounting system in
which it is used, represents the syntax and grammar that makes use of the system codes; (c) the
understanding of the previous relationship, provides the meaning for the use of these codes; and finally,
(d) the pragmatical level in the staircase which is concerned with the relationship between the
perception of the meaning being established in the previous level and the human behavior, that is, audit
judgement.
It is clear from the above, that in order for the auditor to establish an understanding of the
relationship between the auditing system and the world of the accounting system in which it is used, he
needs to treat the semantical level within the business system perspective as central to his methods.
Meaning - A Central Concern To The Auditor
Anything in this world can be regarded as a sign that holds a message of some meaning to
someone. The understanding (Mickhail,1989) of this message may invoke a certain pattern of behavior.
People behaves differently, where they may act or may not act at all. The semantic paradigm of
understanding the relationship between the auditing system and the world of the accounting system in
which it is used is central to my proposed approach to formulating audit judgement.
Harman (1968), distinguishes between three levels in the theory of meaning. Firstly, the meaning
of thoughts, which attempts to explain what it is for a thought to be the thought of so-and-so, etc. As we
have seen earlier on, most of the current approaches treats the meaning of thought as central to their
methods. Secondly, the meaning of communication, which attempts to explain what it takes to
communicate certain information.In other words, the meaning of a message. Finally, the meaning of
speech acts, which explains how the existence of social institutions, rituals, or practices of a group of
speakers can make certain acts possible, e.g., how the existence of an institution of banking can make
possible writing a cheque. In that example, the institution confers meaning on an act like writing one’s
name on a piece of paper. My concern is based on Harman’s three levels of meaning though the
implementation of some of the methodology’s tools demonstrates the second and third levels. As for the
first level of meaning, the meaning of thoughts, it is beyond the scope of my discussion.
Following Backhouse’s analogy (1988) of a business system, I am concerned in my discussion
with the first three levels in the staircase (fig.2), especially the meaning of the message(s). The message
being, the relationship between the auditing system and the world of the accounting system in which it
is used, and the meaning is merely Understanding it. And as the meaning of the message corresponds to
Harman’s (1968) second level of meaning then, I shall focus in my implementation on that level only.
Backhouse (1988), claims that their semantic theory is central to their methods and it assumes that there
is no knowledge without a knower and no knowledge without action. If we relate this proposition to our
problem of judgement, we will find that ‘understanding the relationship...’ doesn’t exist without an
‘auditor’ and no ’understanding the relationship...’ without ‘judgement’. In other words
(Backhouse,1988), "there is no business activity without an agent And the shape of the world he believes
he inhibits is reflection of the way he wants to act, and different agents may view the world quite
differently from one another..".
In applying this view to our context (fig.3), we shall find that, there is no business (audit
judgement system) without an agent (auditor) and the shape of the world (relationship between....) he
believes (understanding the relationship...) he inhibits (forms an audit judgement) is reflection of the
way (my proposed method) he wants to act, and different agents (auditors) may view (understand....)
the world quite differently from one another.
Proposed Methodology (MEASUR) And Its Tools
Present methods of analysis assume that, there is a single objective reality (Backhouse,1988) that
our analysis will reveal, and all agents will be dealing with that one reality. In order to reflect the needs
of different users, we need to enrich the analysis of the business system by taking into account the
existence of different views for the same problem. Current methods of analysis focuses on the procedural
aspects of the system deflecting attention from the substantive. Indeed the vocabulary available to
auditors using current analytic tools makes it extremely difficult to deal directly with the substantive
system. This is done in the MEASUR (Stamper et al.,1988) methodology using one of its tools called:
Semantic Analysis.
Semantic Analysis, by way of discussion extracts the users terminology used to explain their
business problems. We exclude from the terminology list, the ones concerned with the activity
procedures and controls. This is to narrow our focus upon the substantive problem enabling us to isolate
the core of the business and construct a semantic network or ontology chart which shows how one
entity or behavior pattern is existent dependent upon others. Applying Semantic Analysis in this way
(Backhouse,1988), forces the auditor to consider carefully the terms employed in the discourse and
strive to reveal the required substantive behavior. This process forces the auditor to search for the real
meaning of the business problem, hence, performing business analysis rather than merely procedures
analysis.
In the Ontology chart (fig.4), every entity (in MEASUR these are called ‘affordances’) can only
exist during the co-existence of its anticedent(s) to their left. Each existence has a start and finish time
and a beginning and ending process. Some of the problems encountered in the resolution of the
Ontology chart which resulted from semantic analysis, may be highlighted:
* Contract: is there in fact a separate contract between the company and its employees for each
employee number :
or is there one contract upon which the various employee numbers depend (ontologically) ?:
this question might be just a legal nicety or could be an important business matter.
* Fills: the person filling in his hours worked is unlikely to be interested in particular identifiable hours
worked but in filling in a given number of hours worked. If the system were to require tracking
particular hours worked then we would write "hours worked#" instead of just "hours worked" to
denote that we are interested in the identity of particular hours. It is possible that such a requirement
could be introduced as a control on the worked hours especially the payroll expense is a major expense
for the company.
If we have a closer look at these problems, from Harman’s (1968) third level of meaning: Speech
Acts, we will find that in the first problem "Contract", the company confers a certain meaning on the act
of employment. The meaning conferred in "contract" might be the legal ‘obligatory’ dimension of
employment. Another meaning might be a ‘promise’ to perform the job as outlined in the "contract". As
for the second problem "Fills", the intentionality of both the employer and employee towards this act are
quite different. The employee’s propositional attitude (Bechtel, 1988) behind the act of "Fill" in his hours
worked range from filling in the correct number of hours worked to filing in an incorrect number. The
company may have an intention of controlling the act "fill" by introducing a new way of doing the act
"fill" such as filling in the specific hours of the day being worked.
There is a human-factors problem in using Semantic Analysis to reveal potential instabilities in a
system. This problem is that a shift of mental models has to be made from working in terms the
procedural system to working in terms of the substantive business system where much more complex
semantic problems arise.
In sketching the way in which subjective uncertainty resolution occurs - that is, by resort to
sources of belief strength independent of evidence from the empirical world - the principles of the theory
of meaning explains how problem situations are set up within which judgement methods and tools can
operate.
Conclusions & Further Research
I have presented a semiotic interpretation of audit judgement which I have treated in my analysis
as an information system. The interpretation is quite different from that provided by current methods
and it is offered as an alternative to the usual way of thinking about audit judgement.
The audit judgement system as seen as a message system having four major components. The first
of which is the codes that are present in the message. These codes are the auditing system and the world
of the accounting system. The second component, is the syntax or grammar or the way these codes are to
be used. The way of usage is the formulation of the relationship between the auditing system and the
world of the accounting system in which it is used. The third component, is the meaning behind the
usage of these codes. The meaning of the formulated relationship,, which is the understanding of the
relationship... Finally, the fourth component, is the pragmatic behavior as related to the meaning
established earlier on. This behavior is the audit judgement that is based on the understanding perceived
in the third component.
My concern throughout the discussion was focused on the third level of analysis "Meaning" of
the message system. In doing so, I have considered methodologies other than the current ones to be able
to provide a richer cognitive approach to understanding the audit judgement system. Drawing upon
these conclusions, it is now possible to be more specific about the aims being demonstrated. This might
be seen to have three interrelated intentions (Jackson,1990), that can be regarded as future research
directions: (i) to develop behavioral auditing research beyond its current limitations and, in particular to
facilitate the emergence of new methodologies to tackle problem-situations in auditing judgement; (ii) to
reflect upon the relationship between different organisational and societal interests and the dominance
of particular behavioral (Psychological) methods and techniques; (iii) to provide practically useful,
theoretically sound approaches to problematic ‘audit judgement’ situations, which will assist in the
larger process of progressive social change.
However, I would like to note that the scope of this exercise was limited in nature and further detailed
examination is required, though it is a step forward to see things in their right context.
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Appendix
This section describes an illustrative payroll system (taken from the EDP Audit Workshop 1990
exercise). The payroll system represents the accounting system as in fig. (1). As for the auditing system, I
shall be concerned with one of the stages (Fig.5) of the systems based audit approach (Cooper et
al.,1989), namely: Ascertain and record Accounting and internal Control System.
There are a number of ways to record a system. I shall use a Flowcharting technique that is
commonly used in practice. The resulting flowchart (Fig.6) represents the relationship between the audit
system (recording the payroll system) and the world of the accounting system (payroll system problem)
in which it is used.
The Payroll System
XYZ Company is a large manufacturing company in which payroll expense represents a very
high proportion of the operating expenses. XYZ company allows hourly employees to complete their
own time cards by filling in a box on a card daily. The cards are collected by the foremen of the various
departments and checked for completeness and accuracy. Once approved and initialled, the cards are
read by a scanner device that reads the employee number, department, and hours worked. This
information is written onto a magnetic tape that is processed weekly by the company’s mainframe
computer.
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