Selected Published Journal Articles
Hoitash, R., Hoitash, U., & Johnstone, K. (2012). Internal control material weaknesses and CFO compensation.
Contemporary Accounting Research
Boards of directors and compensation committees predominantly use financial measures reflecting executive managerial duties as inputs to executive compensation decisions. Yet, despite the fact that Holmstrom (1979) suggests that any readily available performance measure should be considered in executive compensation decisions, there is little research on the link between executive compensation and non-financial performance measures. We develop and test a model of chief financial officer (CFO) compensation with specific emphasis on the link between the disclosure of internal control material weaknesses (ICMW), a non-financial performance measure reflecting CFO fiduciary duties, and CFO compensation. Since internal controls are under the direct responsibility of the CFO, the disclosure of an ICMW reflects poorly on his/her performance. As a baseline, we find that ICMW disclosures lead to decreases in CFO compensation (bonus, equity, and total). Of greater interest, we find that CFOs at firms with stronger governance experience larger compensation decreases upon ICMW disclosures compared to CFOs at firms with weaker governance. In addition, CFOs at firms with greater costs of financial statement misreporting experience larger compensation decreases upon ICMW disclosures compared to CFOs at firms with lower costs of misreporting. Taken together, these results contribute to the relatively sparse literature on CFOs by illustrating the importance of CFO fiduciary duties and the interaction of those duties, in terms of firm governance and misreporting costs, with changes in CFO compensation.
(29), 768-803. doi: 10.1111/j.1911-3846.2011.01122.x.
Anderson, U., Christ, M., Johnstone, K., & Rittenberg, L. (2012). A post-SOX examination of factors associated with the size of internal audit functions.
This study develops and tests a conceptual model articulating factors associated with internal audit function size in the post-SOX era. These factors include audit committee characteristics, internal audit characteristics and mission, internal audit activities performed by others (including outsourced providers and other divisions within the organization), and organization characteristics. Results of a survey of 173 public and private companies reveal that internal audit function size is positively associated with: (1) better audit committee governance, (2) greater organizational experience of the chief audit executive, (3) missions involving IT auditing, (4) the use of sophisticated audit technologies, (5) the use of a staffing model in which internal audit is used for rotational leadership development, (6) organization size, and (7) the number of foreign subsidiaries that the organization possesses. Further, internal audit function size is inversely associated with: (1) the percentage of internal audit employees that are Certified Internal Auditors, and (2) the extent of assurance and compliance activities outsourced to outsiders. These results contribute to prior literature on internal audit function size by considering a variety of factors that are associated with internal audit function size in the contemporary era.
(26), 167-191. doi: 10.2308/acch-50115.
Johnstone, K., & Keune, M. (2012). Materiality Judgments and the Resolution of Detected Misstatements: The Role of Managers, Auditors, and Audit Committees.
The Accounting Review
This paper investigates how manager and auditor incentives, along with audit committee characteristics, are associated with materiality judgments about detected misstatements. Using data on detected misstatements that occurred between 2003 and 2006, we find that managers are more likely to waive qualitatively material misstatements as analyst following increases. However, auditors? incentives to protect their reputations weaken the effect of managerial incentives associated with analyst pressure; auditors are less likely to allow managers to waive material misstatements as audit fees increase. Regarding audit committee characteristics, results reveal that audit committees with greater financial expertise are less likely to allow managers to waive material misstatements compared to audit committees with less expertise.
(87), 1641-1677. doi: 10.2308/accr-50185.
Johnstone, K., Li, C., & Rupley, K. (2011). Changes in corporate governance associated with the revelation of internal control material weaknesses and their subsequent remediation.
Contemporary Accounting Research
The revelation of material negative events about a firm, including issues such as fraud, restatements, or internal control material weaknesses (ICMWs), may destabilize the firm’s corporate governance equilibrium as it works to remediate the event or effects thereof. Prior research investigates the association between the revelation of fraud and restatements and both board and management turnover. We extend that research, proposing and testing a conceptual model of the process that firms use to remediate negative events in general and ICMWs specifically, with a focus on the role of governance structure changes. Using a sample of 733 firms revealing an ICMW compared to 3,602 firms with unqualified internal control reports, results reveal a positive association between disclosure of ICMWs and subsequent turnover of members of boards of directors, audit committees, and top management. Focusing on the ICMW sample and comparing the 511 firms that remediate their ICMWs to the 222 firms that do not, results illustrate a positive association between remediation of ICMWs and improvements in the characteristics of boards of directors, audit committees, and top management.
(28), 1-53. doi: 10.1111/j.1911-3846.2010.01037.x.
Ettredge, M., Johnstone, K., Stone, M., & Wang, Q. (2011). The effects of firm size, corporate governance quality, and bad news on disclosure compliance. Review of Accounting Studies
(46), 866-889. doi: 10.1007/s11142-011-9153-8.
Johnstone, K., Hammersley, J., & Kadous, K. (2011). How Do Audit Seniors Respond to Heightened Fraud Risk?.
Auditing: A Journal of Practice & Theory
This paper describes how audit seniors modify a standard audit program in response to heightened fraud risk when cues allow formation of specific hypotheses about the nature of the fraud. We conduct an experiment in which we manipulate provision of information about an internal control material weakness. We find that when fraud risk is heightened by provision of material weakness information, audit seniors’ programs are of lower quality. This occurs because these auditors tend to propose audit program modifications that are not effective in detecting the fraud, resulting in programs that are less efficient. We also investigate determinants of higher quality audit programs, finding that program quality increases as auditors identify more risk factors focused on the specific fraud. These results suggest that identifying risk factors focused on the fraud area is critical to the development of high quality audit plans, and thus to fraud detection.
(30), 81-101. doi: 10.2308/ajpt-10110.
Bedard, J., & Johnstone, K. (2010). Audit partner tenure and audit planning and pricing. Auditing: A Journal of Practice & Theory
(29), 45-70. doi: 10.2308/aud.2010.29.2.45.
Bedard, J., Johnstone, K., & Smith, E. (2010). Audit quality indicators: A status update on possible public disclosures and insights from audit practice. Current Issues in Auditing
(4), C12-C19. doi: 10.2308/ciia.2010.4.1.C12.
Johnstone, K., Rittenberg, L., Christ, M., & Anderson, U. (2010). Effective sizing of internal audit departments. Institute of Internal Auditors (2010), 1-80.
Johnstone, K., Rittenberg, L., Christ, M., & Anderson, U. (2010). Effective sizing of internal audit departments for colleges and universities. Institute of Internal Auditors (2010), 1-66.
Bedard, J., Johnstone, K., & Smith, E. (2009). How good is your audit firm?. National Association of Corporate Directors - Directorship Magazine (June/July), 64-67.
Bedard, J., Ettredge, M., & Johnstone, K. (2008). Fee pressure and the longitudinal dynamics of audit engagement budgeting and reporting. Advances in Accounting
(24), 32-40. doi: 10.1016/j.adiac.2008.05.006.
Ettredge, M., Bedard, J., & Johnstone, K. (2008). Empirical tests of audit budget dynamics. Behavioral Research in Accounting
(20), 1-18. doi: 10.2308/bria.2008.20.2.1.
Bedard, J., Ettredge, M., & Johnstone, K. (2007). Using electronic audit workpaper systemsin audit practice: Task analysis, learning, and resistance. Advances in Accounting Behavioral Research (10), 29-53.
Bedard, J., Ettredge, M., Jackson, C., & Johnstone, K. (2007). Knowledge, experience and work-around behaviors: Electronic media in the professional audit environment. Journal of Business and Behavioral Sciences (16), 131-160.
Bellovary, J., & Johnstone, K. (2007). Descriptive evidence from audit practice on SAS No. 99 brainstorming activities. Current Issues in Auditing
(1), A1-A11. doi: 10.2308/ciia.2007.1.1.A1.
Adams, F., Bedard, J., & Johnstone, K. (2005). Information asymmetry and competitive bidding in the market for audit services. Economic Inquiry
(43), 417-425. doi: 10.1093/ei/cbi028.
Muzatko, S., Johnstone, K., Mayhew, B., & Rittenberg, L. (2004). An empirical investigation of IPO underpricing and the change to the LLP organization of audit firms. Auditing: A Journal of Practice & Theory
(23), 53-67. doi: 10.2308/aud.2004.23.1.53.
Bedard, J., & Johnstone, K. (2004). Earnings manipulation risk, corporate governance risk, and auditors' planning and pricing decisions. The Accounting Review
(79), 277-304. doi: 10.2308/accr.2001.76.2.199.
Johnstone, K., Bedard, J., & Ettredge, M. (2004). The effects of competitive bidding on engagement planning and pricing. Contemporary Accounting Research
(21), 25-53. doi: 10.1506/47TF-WHQ1-RG39-8JX4.
Bedard, J., & Johnstone, K. (2004). Audit firm portfolio management decisions. Journal of Accounting Research
(42), 1-32. doi: 10.1111/j.1475-679X.2004.00153.x.
Bedard, J., Jackson, C., Johnstone, K., & Ettredge, M. (2003). The effect of training on auditors' acceptance of an electronic work system. International Journal of Accounting Information Systems
(4), 227-250. doi: 10.1016/j.accinf.2003.05.001.
Johnstone, K., & Bedard, J. (2003). Risk management in client acceptance decisions. The Accounting Review
(78), 1003-1025. doi: 10.2308/accr.2003.78.4.1003.
Johnstone, K., Ashbaugh, H., & Warfield, T. (2002). Effects of repeated practice and contextual-writing experiences on college students' writing skills. Journal of Educational Psychology
(94), 305-315. doi: 10.1037/0022-06184.108.40.2065.
Ashbaugh, H., Johnstone, K., & Warfield, T. (2002). Outcome assessment of a writing-skill improvement initiative: Results and methodological implications. Issues in Accounting Education
(17), 123-148. doi: 10.2308/iace.2002.17.2.123.
Bell, T., Bedard, J., Johnstone, K., & Smith, E. (2002). KRisk: A computerized decision-aid for client acceptance and continuance risk assessments. Auditing: A Journal of Practice & Theory
(21), 97-113. doi: 10.2308/aud.2002.21.2.97.
Johnstone, K., Bedard, J., & Biggs, S. (2002). Aggressive client reporting: Factors affecting auditors' generation of financial reporting alternatives. Auditing: A Journal of Practice & Theory
(21), 47-65. doi: 10.2308/aud.2002.21.1.47.
Johnstone, K., & Bedard, J. (2001). Engagement planning, bid pricing, and client response in the market for initial attest engagements. The Accounting Review
(76), 199-220. doi: 10.2308/accr.2001.76.2.199.
Johnstone, K., Sutton, M., & Warfield, T. (2001). Antecedents and consequences of independence risk: Framework for analysis. Accounting Horizons
(15), 1-18. doi: 10.2308/acch.2001.15.1.1.
Johnstone, K. (2001). Risk, experience, and auditors' client acceptance decisions. National Public Accountant
Trotman, K., Grambling, A., Johnstone, K., Kaplan, S., Mayhew, B., Reimers, R., Schwartz, H., & Wright, B. (2000). Twenty-five Years of Audit Research.
Ashbaugh, H., Johnstone, K., & Warfield, T. (1999). Corporate reporting on the internet. Accounting Horizons
(13), 241-257. doi: 10.2308/acch.19220.127.116.11.
Johnstone, K., & Biggs, S. (1998). Problem-based learning: Introduction, analysis, and accounting curricula implications. Journal of Accounting Education
(16), 407-427. doi: 10.1016/S0748-5751(98)00026-8.
Johnstone, K., Bedard, J., & Biggs, S. (1996). Framing effects and output interference in a concurring partner review context: Theory and exploratory evidence. Deloitte & Touche/University of Kansas Symposium Proceedings (8), 165-193.