Learning from errors:: Barriers and drivers in audit firms

Audit firms and financial statement auditors are charged with the responsibility to provide a reliable opinion about the fairness and accuracy of their client’s financial statements. However, the past years’ inspections by audit regulators have identified many shortcomings that may reduce the quality of their work, and thus the reliability of issued auditor reports. It is likely that many of such problems arise because auditors make errors during their work. As such, it is no surprise that several related professional bodies and audit firms state that audit quality may be improved by stimulating learning from errors. Accordingly, this dissertation explores how audit firms can support learning from errors in order to stimulate the quality of work done. Research in auditing and other research domains identifies various factors that may influence learning from errors that may be divided in three main categories: error characteristics (e.g., error consequences, error type), mental processes (e.g., cognition, emotions), and work conditions (e.g., culture, time pressure). Also, research in auditing suggests that an open error management climate (EMC), which stimulates learning from all errors and avoids resulting punishment, may be a valuable tool for stimulating learning from errors. This leads to three empirical studies examining the central research question of how auditors make sense of and learn from their own errors. More specifically, this dissertation explores how the error characteristics, mental processes, and work conditions affect auditors’ learning from errors, and whether firms should use an open EMC to amplify learning from errors through these factors. The first study uses a qualitative (interviews) approach while the latter two studies are quantitative (experiment, experiential survey) in nature. All data used for this dissertation have been collected through the participation of practicing auditors. On the whole, all three studies show that auditors predominantly learn from errors when the associated consequences are relatively large as opposed to relatively small. Further, results of the studies suggest that strong negative emotions and high time pressure may serve as barriers towards learning from errors, while relatively low levels of these factors act as drivers rather than barriers towards learning from errors. Finally, results demonstrate that an audit firm’s EMC can be effective in enhancing learning from errors when error consequences are large and time pressure is high. These findings contribute to the literature that considers learning in audit firms. While previous research shows that auditors develop their professional knowledge and skills during the review process, performance evaluations, formal mentoring, and training sessions, this dissertation sheds light on how auditors may improve the quality of their work by learning from errors. Besides the theoretical contribution, this dissertation’s results show that auditors and audit firms would benefit from developing an EMC that stimulates learning from all errors regardless the circumstances. To this end, implications are formulated that provide guidance to how audit firms, individual auditors and regulatory oversight can contribute to the development of such an EMC