November 1998 Issue



By Thomas C. Wooten and
Brian K. Brown

The competition of the last decade continues to shrink the profit margins on most traditional audit services. CPA firms are forced to make continuous improvement in the delivery of the audit product in order to remain competitive. Both technical and administrative aspects of the audit process are areas that should be examined to make the audit more efficient and increase the audit team's productivity. One improvement that can help bring about this change is a feedback system that gives professional staff the opportunity to review their team leaders. Although performance evaluations are not new to audit teams, reverse, or upward, performance appraisal systems are not the norm. An upward performance appraisal system is a process by which individuals receive performance feedback from peers and subordinates. An increasing number of service firms are using upward performance appraisals to improve the communication, development, and productivity of employees.

Good Fit for Audit Engagements

Accounting professionals on an assurance engagement are prime prospects for the use of upward performance appraisals. Auditing engagements are often staffed with an array of professionals including a partner, a manager, an in-charge, and one or more staff auditors. Performance appraisals are usually directed downward, with subordinates being evaluated by their superiors. The staff auditors are evaluated periodically by the in-charge (usually at the end of an engagement); the in-charge is evaluated by the manager, and the manager is evaluated by the partner. This traditional type of performance appraisal is very useful. The superiors in each of these evaluation situations have much practical and professional experience in understanding the roles of their respective subordinates. However, the traditional performance appraisal is a one-source, one-way evaluation and is incomplete. Using an upward performance appraisal taps multiple employee perspectives. The result is better information for improving the management of the audit engagement and possibly finding significant efficiency and savings.

Some firms have been reluctant to attempt upward appraisals because of employee skepticism and perceived administrative costs. It goes against tradition and comfort to let subordinates evaluate their superiors. However, it is not difficult to design an inexpensive, simple, and fair appraisal system that will allow audit supervisors to increase their managerial effectiveness while improving communication among the professional staff of the firm.

Evaluating the In-Charge Auditor

An illustration of the development of an upward performance system for use with the in-charge/staff auditor relationship will make this clear. Over the course of a year, an in-charge auditor may supervise numerous staff professionals on many different engagements. The in-charge is often responsible for guiding audit engagements and staff after only a few years of work experience. The in-charge auditor acquires management skills through a combination of on-the-job training and perhaps continuing professional education programs. Given the nature of the audit task, managers or partners may not spend significant time monitoring the day-to-day activities and management skills of the in-charge auditor. The partners and managers often see only the final output and are concerned ultimately with whether the job was done accurately and on time. Since the managers and partners are not present to provide daily feedback, there is a need for a mechanism by which in-charge auditors can better develop their management and teamwork skills.

Scope of the System

Organizations typically design appraisal systems for one of several reasons, such as employee development, employee training, compensation decisions, and promotion decisions. It is difficult to design an appraisal system that meets all of these goals. Under an appraisal system used both in making compensation decisions and in motivating employees to be honest about their development needs, for example, the employee may hide weaknesses in an attempt to appear as impressive and knowledgeable as possible to receive the maximum raise.

There is a tendency to want to use performance appraisals to measure everything, making the process complex and of questionable value. The upward performance appraisal should be just one of several assessment techniques and should focus on achieving a few specific purposes.

It is best for most firms to use upward performance appraisals primarily for personal development. For example, a firm may decide that an upward appraisal can help an in-charge auditor identify weaknesses and develop effective managerial skills. Therefore, information gained from upward appraisals should be used by the in-charge auditor as part of a self-assessment, training, and goal-planning process. The firm can use other appraisal and evaluation processes separately or together to make related compensation and promotion decisions.

Measuring Skills and Behavior

An upward appraisal gives the unique perspective that the staff has about the skills and behaviors of an in-charge that the managers and partners cannot see. Therefore, the items chosen should focus on skills and behaviors these subordinates are in a position to evaluate. The process begins with a job analysis of the in-charge. The skills and abilities that are expected of an in-charge should be identified, along with the skills and behaviors the staff are most qualified to comment on. For example, Exhibit 1 shows a list of possible expectations of an in-charge. Staff personnel may not be deemed qualified to comment on the expectations of firm growth, technical expertise, and engagement profitability. These expectations require the experience of managers and partners and would be included in a traditional evaluation. However, engagement management is an area where a staff member could provide tremendous insight. Taking the example further, it may be decided that areas such as providing a team focus for engagements, providing guidance and support for all assigned staff, and managing the staffing of the engagement are ones in which staff can provide valuable input. We could then identify behaviors that demonstrate mastery of these skills and design a series of questions to evaluate them.

Exhibit 2 provides a sample upward appraisal form that lists several possible questions regarding these three factors. In Exhibit 2, under team focus, our appraisal form shows that the in-charge should "clearly explain the overall audit plan for the engagement" and "listen to staff input and ideas." These skills should be truly important to the firm, as evidenced by the actions of managers and partners. The best way to destroy the benefits of the upward appraisal system is to measure one behavior and then expect something completely different.

The results provide the in-charge with a relative score to compare to other behavior scores and to previous evaluations. The form also has space for open-ended responses. The written responses help encourage the staff to provide detailed comments on specific areas that need improvement.

Most researchers agree that appraisers' responses should remain anonymous to protect the honesty of the responses. It may be desirable to provide the results in summary form and to retype the written responses in order to maintain anonymity. The appraisal should be filled out at the end of a significant engagement or at other regular intervals. Generally, anonymity can be assured when there are a number of appraisers. For smaller firms to maintain anonymity, it may be necessary to collect the forms after several engagements before conveying the results to the in-charge.

Managing the Output

To keep the system simple, there must be a method to help the in-charge quickly identify any strengths and weaknesses and to develop a plan for self-improvement.

Having the in-charges complete self­upward appraisal forms may help them identify their own weaknesses. Additionally, they can compare their results with those generated from the staff. Similarities between the in-charge's self-ratings and the staffs' ratings indicate that the audit team is sufficiently aware of its strengths and weakness. A lack of harmony among the results may indicate greater problems. Exhibit 3 shows the four possible results that can come from the comparison of staff ratings with the in-charge's own self-ratings. Type 1 and 2 feedback is generally well received, because the staff has rated the in-charge in a positive manner. In fact, the in-charge may be pleasantly surprised to find strengths of which he or she was unsure. Type 3 feedback identifies obvious weak areas in the in-charge's management skills, which should be specifically addressed in a self-development or improvement plan. Type 4 feedback is the most troublesome, because the staff and the in-charge are in disagreement. Research indicates that approximately 15 to 20 percent of the feedback will be Type 4 feedback. This unexpected negative feedback may be difficult for the in-charge to accept and may cause confusion and defensiveness. When there is negative Type 4 feedback, it is especially important for the in-charge to discuss the results with a mentor or human resources professional to deal with it effectively.

Many organizational leaders assume that professionals have enough motivation to make self-improvements once the need for improvement has been identified. This is often untrue unless there is a self-improvement plan in place. As part of a periodic evaluation process, the in-charge should complete a written professional growth plan that includes personal and career goals and objectives. The results of the upward appraisal, along with other assessment devices, should be used in determining training needs and performance objectives. These needs and objectives should be detailed within a specific plan to accomplish these goals. Unless there are specific results and uses of the appraisal process, it becomes nothing more than a formality.

Some organizations may encourage the in-charge to communicate back to the staff the results of the appraisal and explain how the results will be used to make improvements. This is theoretically the best way to encourage free and open discussion within the organization and hold the in-charge accountable for improvements; however, it is a difficult task that requires significant planning and facilitating. Unless your organization has already achieved an open and sharing environment, it would be best to refrain from making public any specific results.

Benefits for the Staff

Several benefits also accrue to the staff. First, being involved in the appraisal process provides the staff an outlet by which to communicate ideas and concerns to supervisors. The staff learn to give and receive constructive feedback and direction. The staff realize that they are valuable and that their opinions are important. This type of employee involvement can enhance motivation, self-esteem, and commitment.

Second, the staff gains a better understanding of the expectations of the in-charge position. Most all of the staff will be promoted to the in-charge position within two years of employment. The upward appraisal process provides an excellent forum to reflect upon the skills they need to excel at the next level. Watching the in-charges learn from their mistakes, the staff gains a better understanding of how an audit engagement can best be managed. The staff can observe the in-charge and pattern their management skills after the best practices the in-charges exercise. *

Thomas C. Wooten, PhD, CMA, CPA is an assistant professor of accounting at Belmont University. Brian K. Brown is with KPMG Peat Marwick.

Douglas R. Carmichael, PhD, CPA
Baruch College

John F. Burke, CPA
The CPA Journal

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