Leading the Way

WSB professor Karla Johnstone
Professor Karla Johnstone last year was named the Wisconsin School of Business's first Wade and Beverly Fetzer Fellow.
A good auditor needs a keen eye to notice what isn’t obvious, though it’s pretty easy to see how Karla Johnstone (MAcc ’91) is making an impact at the Wisconsin School of Business.

Johnstone, EY Professor in Accounting, was the School’s 2016 recipient of the prestigious Erwin A. Gaumnitz Distinguished Research Award that recognizes her research in the field of auditing. Her contributions don’t stop there.

Last year Johnstone was named the School’s first Wade and Beverly Fetzer Fellow, established with a gift from Wade Fetzer III (B.S. ’59) and his wife, Beverly, to provide faculty support focused on building new knowledge related to China. In March 2016, Johnstone traveled with a Wisconsin Alumni Association contingent to China, where she met with alumni and other academics, and presented her research at Tsinghua University in Beijing and the Chinese University of Hong Kong.

Research, teaching, travel, and service make for a jam-packed calendar, but they are all intertwined, and WSB students reap the benefits.

“What I like about my research is that I get to find the answer to things I don’t know about,” Johnstone says. “It’s a way to always bring new things into the classroom, which makes teaching fun for me and learning fun for my students.”

Johnstone teaches undergraduate and graduate-level auditing, the post-internship MAcc Professional Issues, and will teach a behavioral accounting Ph.D. seminar in Spring 2017. She’s also lead author of an auditing textbook that students use in her classes.

Next-generation leadership

Johnstone joined the WSB in 1997 after obtaining her Ph.D. from the University of Connecticut. Her Ph.D. is in accounting, with a minor in psychology. She is serving a term this academic year as president of the Auditing Section of the American Accounting Association. In 2008, she was awarded the WSB’s Chipman Outstanding Faculty Teaching Award.

“Karla is one of the next generation of leaders in the School on all fronts—teaching, research, leadership, scholarship, international recognition, and service,” says Terry Warfield, PwC Professor in Accounting at the Wisconsin School of Business and chair of the Department of Accounting and Information Systems. “That’s special.”

It’s all part of the academic life that Johnstone knows well because she was born into it. Her father, Karl Zehms (BBA ’64, MBA ’65, Ph.D. ’70), was the academic chair of the Accounting Department at the University of Wisconsin–Green Bay until his retirement in 2007.

Johnstone was born when her father was pursuing his doctorate at the Wisconsin School of Business. In addition, her sister, Karen Scheppelmann (BBA ’00, MAcc ’01) was recently admitted to the partnership (audit) at KPMG in Denver.

Research is the dominant focus of work for Johnstone.

“I made it a point to go to a research-active institution where faculty research productivity is valued. I always focus on keeping my eye on the ball to emphasize research,” she says.

Professor Karla Johnstone
Working with Ph.D. students is a particular passion for Professor Johnstone, joined here by (from L-R) Eric Condie (Ph.D. ’17), Zach Kowaleski (Ph.D. ’18), Amy Tegeler (Ph.D. ’17), and Kim Walker (Ph.D. ’20). Professor Johnstone’s Ph.D. was in accounting with a minor in psychology, a combination that continues to inform her research.

Johnstone’s research emphasis is on audit quality, particularly in the areas of audit firm portfolio management, planning and audit conduct, fraud detection, and corporate governance. Her most recent research publications include investigations on the effectiveness of auditors’ fraud brainstorming, along with an analysis of audit committee member incentives with respect to the resolution of detected financial statement misstatements. She also recently received a Foundation for Audit Research grant (Netherlands), titled “Professional skepticism profiles: Effects on audit processes and the moderating role of audit firm culture.”

“I’m interested in the behavior of auditors, the behavior of boards and their incentives,” she says, “how they make decisions, good or bad, and how those decisions affect audit quality and users’ reliance on financial statements.”

The watchdog role of auditing

The bad decisions are what really spark students’ interest, she says, and she tries to pepper her undergraduate classes with stories about them.

“One of their favorite things is when we go to the Securities and Exchange Commission website and see which auditors or managers have been up to mischief,” Johnstone says. “Or you see a headline that says, ‘Trusted church employee found guilty of embezzling $6 million.’

“In an undergraduate auditing class we ask, ‘How could this happen?’” Johnstone says. “There are a lot of rules, but students can remember it better if they hear or read a story.”

While the bad stuff might make for a good story, auditors’ watchdog role drives Johnstone’s interest.

“I’m passionate about this because it represents stock portfolios of people, all of our retirement is reflected in that, and so is the stability of our economy,” she says. “You need auditors to provide that assurance.”

Students take that understanding into their professional lives. Salman Aasi (MAcc ’14) said he emerged from Johnstone’s class with a clearer picture that what’s on financial statements is far more than numbers.

“We learned about the audit process but perhaps more importantly, we learned that what is in the financial statements impacts peoples’ lives—their decisions, their savings, their trust are all at stake,” says Aasi, now a senior associate at Duff & Phelps in Chicago. “It is our responsibility to assure that what is in the financials is as accurate as can be.”

Global mindset in the classroom

In 2013, Johnstone traveled to Ernst & Young LLP, now known in the market as EY, in New York to learn about its focus on increasing global perspectives and diverse viewpoints.

Global mindset teaches self-reflection, cultural competence, and global knowledge. Helping students develop those skills was the impetus behind EY’s funding of Johnstone’s endowed chair in 2013 as it aligns with EY’s priorities.

“If you go to New York and work in auditing or investment banking, you might be on a team with 20 people, and easily 10 of them can be from anywhere in the world,” Johnstone says. “You need to know the different nuances of working with people.”

Karla is one of the next generation of leaders in the School on all fronts—teaching, research, leadership, scholarship, international recognition, and service. That’s special.

Terry Warfield PWC Professor in Accounting, the Wisconsin School of Business

Johnstone brought back some of that experience after her trip to China, showing her class pictures and videos that she captured in Beijing, Shanghai, and Hong Kong.

“It’s important that students understand that you have to go with the flow and learn to determine what the right thing is if you’re not sure—careful and thoughtful observation and acceptance of differences is a key to achieving a global mindset,” she says.

Providing a global perspective

Students find the global mindset approach valuable when they enter the work world, Aasi says.

“You learn to understand where people are coming from no matter their financial background, if they’re from the Midwest, the East Coast, the West Coast, another country, or different races and religions,” he says.

David Gay, managing partner of EY in Milwaukee, says through Johnstone’s guidance he has seen WSB students display increased awareness of cultural differences and a much better understanding of the importance of an inclusive environment.

Professor Karla Johnstone as a child with her father and sister Karen
Accounting is all in the family for Professor Johnstone, who was born when her father, Karl Zehms (left), was pursuing his doctorate at the Wisconsin School of Business. Her younger sister Karen (sitting) is also a WSB accounting alumna.

“As importantly, we’ve seen an increase in students’ willingness to challenge their comfort zone and engage in authentic conversations about diversity,” Gay says. “With an increasingly globally connected world, this is preparing them both professionally as well as personally. We’re excited to see the momentum.”

Beyond the global mindset initiative, Warfield says Johnstone’s greatest contribution to the Wisconsin School of Business is what he calls “balanced excellence.”

“She’s done a great job keeping the momentum,” he says. “Nothing has changed since she has gone from being an assistant professor to earning tenure. She’s not resting on her laurels. That’s not Karla, no way. She just keeps going.”

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