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  • Jennifer M Mueller-Phillips
    An Examination of How Entry-Level Staff Auditors Respond to...
    research summary posted July 15, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.02 Impact of Fees on Decisions by Auditors & Management, 04.04 Moral Development and Individual Ethics Decisions, 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours 
    Title:
    An Examination of How Entry-Level Staff Auditors Respond to Tone at the Top vis-a`-vis Tone at the Bottom.
    Practical Implications:

    These findings add to the understanding of how accountants respond to ethical tones at all levels within their organization and provide important evidence that the tone at the bottom is a key determinant, more so than tone at the top, of the ethical decision making of staff auditors. This study provides important insights into how ethical tone at multiple levels of an organization impacts entry-level employees’ ethical decision making. By recognizing the important role that immediate supervisors play in influencing their subordinates, organizations can more effectively promote an ethical culture at all levels of the organization and not simply at the top.

    Citation:

    Pickerd, J. S., Summers, S. L., & Wood, D. A. 2015. An Examination of How Entry-Level Staff Auditors Respond to Tone at the Top vis-a`-vis Tone at the BottomBehavioral Research in Accounting 27 (1): 79-98.

    Keywords:
    accountability, auditing, control environment, tone at the top, underreporting
    Purpose of the Study:

    The purpose of this study is to examine how entry-level staff auditors make decisions in the presence of sometimes conflicting ethical tones set by their supervising senior (tone at the bottom) and partner (tone at the top).

    The authors employ self-concept maintenance theory, which argues that unethical behavior becomes acceptable to the degree the action can be rationalized, is used to motivate this study. The low ethical tone of supervisors at the top and/or bottom may cause entry level staff auditors to construe unethical situations as devoid of ethical implications, such that entry level staff auditors may act more unethically if either (or both) of their supervisors exhibit a low ethical tone. Further, in-group bias theory, which suggests that individuals will be more influenced by close in-group members who are similar to them than by out-group members who are dissimilar to them, is used to predict that entry-level staff auditors will follow the tone set by their senior more than the tone set by a partner. This study also examines how individuals perceive their own ethical decisions under such conditions.

    Design/Method/ Approach:

    A 2x2 between-subjects experiment is administered to 114 graduate accounting students from a private university. 70 percent of participants had performed an internship and 72 percent had signed with an employer. Participants are told they went over budget on the number of hours they spent auditing cash and must decide how many to report. Ethical tone is manipulated using the tone from both the engagement senior and engagement partner. The evidence was gathered prior to September 2014.

    Findings:
    • The findings indicate that tone at the top and tone at the bottom interact, such that if either the partner and/or the senior exhibit low tone, then participants are more likely to misreport the number of hours they worked on the engagement.  
    • Participants are more influenced by the tone set by their supervising senior than that of their engagement partner. This suggests to the authors that tone at the bottom is a critical determinant of the ethical decision making of entry-level staff auditors.  
    • Tone significantly affects whether participants interpret the decision to underreport as an ethical dilemma. 
    • When both a partner and a senior exhibit high tone, participants are significantly more likely to interpret their decision on whether to underreport hours as an ethical dilemma than in the other conditions. This result suggests that poor tone causes individuals to cease considering the ethical implications of their decisions, thus allowing them to maintain a high self-concept when they violate organizational standards.
    Category:
    Independence & Ethics
    Sub-category:
    Impact of Fees on Decisions by Auditors & Management, Individual & team conduct (e.g. premature signoff - underreporting hours), Moral Development and Individual Ethics Decisions
  • Jennifer M Mueller-Phillips
    Audit team time reporting: An agency theory perspective.
    research summary posted September 16, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours, 10.0 Engagement Management, 10.01 Budgeting and Audit Time Management 
    Title:
    Audit team time reporting: An agency theory perspective.
    Practical Implications:

    This study contributes to the literature in a number of important ways. First, the authors present evidence that managers still tacitly encourage underreporting by their engagement team, even in a setting without explicit mention of time budgets as a performance metric. Thus, while explicit incentives may have reduced, it appears likely that implicit manager incentives to underreport persist. Second, the results suggest that managers’ tacit encouragement of underreporting is contrary to what the “principals” of the firm appear to want. Further, the authors find a positive association between partners’ beliefs about how likely it is the senior reported all hours worked and their preference for the senior. Third, the agency framework perspective on the phenomenon of underreporting suggests that agency theory can assist researchers, regulators, and practitioners wishing to understand and curb the behavior.

    Citation:

    Agoglia, C. P., R. C. Hatfield, and T. A. Lambert. 2015. Audit team time reporting: An agency theory perspective. Accounting, Organizations & Society 44: 1-14.

    Keywords:
    auditing, agency theory, engagement budgeting, reporting accuracy
    Purpose of the Study:

    This study examines the role agency incentives play in diminishing the effectiveness of firm policies aimed at reducing underreporting of time. Underreporting occurs when an auditor does not record all hours worked on a particular engagement and is believed to negatively affect audit quality, to lead to other unethical and dysfunctional audit behaviors that can increase audit risk, and to result in incorrect information being used in client pricing and retention decisions. As a consequence, audit firm policies expressly prohibit underreporting.

    While some research suggests that explicit incentives to meet time budgets have recently been reduced at audit firms, there is also evidence indicating that audit seniors and staff still feel at least implicit pressure to meet budgets. The authors examine the possibility that both of these findings tell a part of the story. Specifically, they explore whether, and under what conditions, seniors and staff are implicitly encouraged to underreport time through future engagement staffing decisions and the performance evaluation process. Further, the authors consider the extent to which agency theory can serve as a framework for understanding how the incentives of audit managers and partners influence how they view underreporting by their engagement staff.

    Design/Method/ Approach:

    Participants in Experiment 1 were 100 audit managers. Managers had, on average, 9.7 years of audit experience. Participants in Experiment 2 were 119 audit partners. Partners had, on average, 25.8 years of audit experience. The authors conducted the experiments prior to May 2015.

    Findings:
    • When managers’ agency-related incentives conflict more strongly with those of the firm (more desirable client), they tend to tacitly encourage underreporting through their evaluations of the senior’s performance.
    • When the client is less desirable, managers’ preference for underreporters dissipates.
    • These results are consistent with agency theory expectations, as managers behave more like agents, acting in their own interest when their incentives conflict with the firm’s, but acting more in the firm’s interest when there is no strong conflict between their incentives and the firm’s.
    • Managers are also more likely to request an underreporter on a future engagement.
    • In contrast, partners placed in the same setting show no evidence of encouraging underreporting.
    • Thus, the results suggest that managers’ tacit encouragement of underreporting is contrary to what the “principals” of the firm (i.e., partners) appear to want. While firms may have reduced their emphasis on formal, explicit incentives to underreport, it appears likely that implicit manager incentives persist.
    Category:
    Engagement Management, Independence & Ethics
    Sub-category:
    Budgeting & Audit Time Management, Individual & team conduct (e.g. premature signoff - underreporting hours)
  • The Auditing Section
    Auditors’ Identification with their Clients and its Effect o...
    research summary posted April 16, 2012 by The Auditing Section, tagged 04.0 Independence and Ethics, 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours, 09.0 Auditor Judgment 
    Title:
    Auditors’ Identification with their Clients and its Effect on Auditors’ Objectivity
    Practical Implications:

    The results of this study are important for audit firms to consider in designing their independence training sessions.  It is important to encourage audit employees to gain familiarity and knowledge with their clients to increase the overall quality of the audit.  However, if increased familiarity results in audit employees identifying more with their clients as opposed to the audit firm, it can cause a decrease in independence and objectivity.  The results of this study indicate that experienced auditors and auditors with a greater sense of identification with the CPA profession are less likely to “give-in” to their clients.  Audit firms should focus on instilling a sense of duty to the audit firm and the CPA profession early on in their training sessions. 

    Citation:

    Bamber, E.M. and V.M. Iyer. 2007. Auditors’ Identification with their Client and its Effect on Auditors’ Objectivity. Auditing: A Journal of Practice and Theory 26 (2): 1-24.

    Keywords:
    Auditor objectivity, auditor independence, client identification, professional identification, and social identity theory
    Purpose of the Study:

    Recently there has been increased regulatory focus on auditor independence and objectivity.  In a 2000 exposure draft, the Independence Standards Board identified auditors’ familiarity with the client as one of five threats to auditor independence.  The underlying concern expressed by regulators is that certain relationships (“close ties”) between the auditor and the client are inappropriate because they impair auditors’ objectivity in performing the audit, which in turn contributes to perceived audit failures.  This paper addresses this concern by investigating whether auditors unconsciously/unknowingly jeopardize their independence and objectivity based on their relationship with their clients.  Below are three objectives that the authors address in their study: 

    • Examine the extent to which auditors begin to identify more with their clients as opposed to their audit firms (e.g. employer).  Causes include years spent on the client engagement, client importance, and client image.  An example, not included in the
      article, would be auditors that serve Fortune 500 clients for many years.  Given the demands of these clients, the auditor will likely spend the majority of their year at the client site, rarely going to the audit firm office.  Given this, it is possible that the auditor will begin to identify and adopt the culture of the client opposed to the audit firm. 
    • Examine outcomes of auditors’ identification with their clients.  Specifically, the authors evaluate whether auditors that identify more with their client are more likely to “give-in” to client pressures and allow the client to take aggressive accounting positions.  
    • Examine other factors that might increase or decrease the effect of client identification on the likelihood that the auditor will give-in to client pressure.  These include client size, firm tenure with the client, auditor experience, and auditor’s identification with the CPA profession. 
    Design/Method/ Approach:

    The authors collected their evidence via research questionnaires mailed to AICPA members employed as auditors at Big 5 audit firms in the early 2000s time period.  Survey participants were asked questions about client identification, professional identification, and client image and then were asked to perform a case that dealt with auditors’ behavior in an audit conflict situation. 

    Findings:
    • The authors find that auditors do identify with their clients, although there is significant variability across auditors’ level of client identification and, on average, client identification is lower than professional identification.  
    •  The authors find that auditors that have greater identification with their client are more likely to agree with the client-referred position regarding a materiality issue and not recommend recording an adjustment for unrecorded liabilities.  However, the authors find that auditors that have more experience and greater identification with the CPA profession are less likely to agree with the client preferred position.  The authors interpret these results as support for recent efforts by regulators and  accounting firms to emphasize the tone at the top and to push professional values down the firm hierarchy.  
    • The authors find that increases in client size and audit firm tenure do not appear to increase the likelihood that the audit firm will give-in to theclient-preferred position. 
    Category:
    Independence & Ethics, Auditor Judgment
    Sub-category:
    Individual & team conduct (e.g. premature signoff - underreporting hours), Auditors’ Professional Skepticism
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  • Jennifer M Mueller-Phillips
    Client Identification and Client Commitment in a Privately...
    research summary posted October 20, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.04 Auditors’ Professional Skepticism, 09.0 Auditor Judgment, 09.06 Adequacy of Disclosure 
    Title:
    Client Identification and Client Commitment in a Privately Held Client Setting: Unique Constructs with Opposite Effects on Auditor Objectivity.
    Practical Implications:

    The results of this study suggest a course of action for enhancing professional skepticism, so they are important for audit firms specializing in privately held clients, which is an institutional setting where auditors may find it more difficult to maintain their objectivity. The authors suggest that audit firms can use their internal messaging to help individual auditors decrease the harmful effects of client identification. Specifically, audit firms can encourage auditors to (1) take the perspective of financial statement users (e.g., shareholders), (2) view themselves and clients as members of a group assigned the goal of providing accurate financial statements to shareholders, and/or (3) identify more strongly with the audit firm or the audit profession. Furthermore, the authors suggest that audit firms increase client commitment by encouraging auditors to be more attentive and available to clients (e.g., catching up with clients periodically and spending more time at the client site) and encouraging clients to feel free to reach out to auditors.

    Citation:

    Herda, D. N. and J. J. Lavelle. 2015. Client Identification and Client Commitment in a Privately Held Client Setting: Unique Constructs with Opposite Effects on Auditor Objectivity. Accounting Horizons 29 (3): 577-601.

    Keywords:
    organizational identification, organizational commitment, social identity theory, social exchange theory, auditor objectivity
    Purpose of the Study:

    Prior accounting scandals raised concerns that auditors’ relationships with their clients lower auditor independence, which in turn lowers professional skepticism, and ultimately decreases audit quality. Accounting research attempting to shed light on the social processes related to such concerns suggest that client identification can decrease auditor. However, the authors argue that client identification (i.e., “the extent to which an auditor’s self-concept and self-definition are derived from perceived oneness with the client”) differs from client commitment (i.e., “a responsibility for and a dedication to the client, but the auditor and client remain separate psychological entities”). The purpose of this study is to discover if (1) client identification and client commitment are two different ideas, (2) client identification detracts from auditor objectivity, and (3) client commitment enhances auditor objectivity.

    Design/Method/ Approach:

    The authors collected their evidence via research questionnaires emailed to auditors, ranging from staff auditors to partners, at a large regional public accounting firm during the summer of 2013. Survey participants were asked questions about client identification and client commitment, and then were asked to perform a case that dealt with auditors’ behavior in an audit conflict situation.

    Findings:
    • The authors find that client identification and client commitment really are two different ideas.
    • The authors find that client identification is associated with lower auditor objectivity.
    • The authors find that client commitment is associated with higher auditor objectivity.
    • The authors find that number of years of audit experience impacts auditor objectivity for auditors at lower levels in the audit firm’s hierarchy (i.e., staff auditors and seniors), but not those at higher levels in the hierarchy (i.e., manager and above). In other words, more junior staff exhibit greater audit objectivity if they have more years of audit experience.

    These results suggest that audit firms specializing in privately held clients may enhance audit quality by decreasing auditors’ client identification and increasing auditors’ client commitment.

    Category:
    Auditing Procedures - Nature - Timing and Extent, Auditor Judgment, Independence & Ethics
    Sub-category:
    Adequacy of Disclosure, Auditors’ Professional Skepticism, Individual & team conduct (e.g. premature signoff - underreporting hours)
  • Jennifer M Mueller-Phillips
    How Partners’ Views Influence Auditor Judgment
    research summary posted September 10, 2013 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours, 09.0 Auditor Judgment, 09.10 Prior Dispositions/Biases/Auditor state of mind, 10.0 Engagement Management, 10.03 Interaction among Team Members 
    Title:
    How Partners’ Views Influence Auditor Judgment
    Practical Implications:

    While the audit partner is ultimately responsible, an audit opinion relies upon the work and judgments of numerous auditors at different levels throughout the firm (NYSSCPA 2009). Therefore, it is important that audit teams have access to independent judgments of individual auditors throughout the audit process. However, the authors’ findings provide evidence that “knowledge of superiors’ views biases auditors’ reports of their prior independent judgments, potentially inhibiting discussion and resolution of contrary views.”

    Whether judgment subordination is intentional or attributable to unconscious biases is not clear from the study. However, it is clear that it is insufficient for an auditor simply to formulate an opinion prior to hearing that of a superior. Rather, auditors should formulate and document their opinions prior to consulting with superiors and colleagues.

     

    It is not clear from this study whether the behavior described is prevalent among audit managers. It is possible that experience mitigates the likelihood of auditors to rely upon superior’s opinions. In addition, the judgment task involved a conservative alternative; it is possible that the effect will diminish when the partner’s opinion represents a less conservative alternative. 

    Citation:

    Peytcheva, M. and P.R. Gillett. 2011. How Partners’ Views Influence Auditor Judgment. Auditing: A Journal of Practice & Theory 30 (4): 285-301.

    Keywords:
    Audit judgment, motivated reasoning, cognitive bias
    Purpose of the Study:

    Prior research suggests auditors are likely to concur with the opinion of superiors if they learn of a superior’s opinion before forming their own judgments. This study examines the malleability of auditor judgments to the opinion of a superior after-the-fact. When given the opportunity to formulate an initial independent judgment, do auditors report later that they concurred with an audit partner’s contrary opinion?

    Design/Method/ Approach:
    • Participants were practicing auditors (27% audit seniors and 73% associates) as well as senior-level auditing students.
    • The study employed an experiment in two parts with participants divided into two experimental groups and one control group.
    • In part one, a judgment task was presented to each participant (whether to capitalize or expense an asset) and each participant was required to make a judgment but to wait to record that judgment until later:
    • Before Group: the experimental group that received an audit partner’s opinion (to expense the item) before they made their initial judgment
    • After Group: the experimental group that received an audit partner’s opinion (to expense the item) after they made their initial judgment
    • Control Group: made their judgment without receiving a partner opinion at any stage
    • In part two, the participants were asked to record the individual judgments they remembered making in part one.
    Findings:

    The authors find that around 80% of both experimental groups (the ‘before’ group and the ‘after’ group) selected to expense the item, versus only around 30% of the control group. Even among the sample of practicing auditors the percentage selecting to expense was around 75% in both experimental groups compared to 25% in the control group. There is no significant difference between the before and after groups, but there is a significant difference between the experimental groups and the control group. Therefore, the authors find that the audit partner’s opinion affects individual auditor judgments in a similar manner whether or not the auditor forms an independent opinion prior to learning of the partner’s opinion.

     

     

    Category:
    Auditor Judgment, Engagement Management, Independence & Ethics
    Sub-category:
    Individual & team conduct (e.g. premature signoff - underreporting hours), Interaction among Team Members, Prior Dispositions/Biases/Auditor state of mind
  • Jennifer M Mueller-Phillips
    Nonaudit Services and Earnings Management in the Pre-SOX and...
    research summary posted March 2, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.09 Individual & Team Conduct - e.g., premature signoff, underreporting hours, 09.0 Auditor Judgment 
    Title:
    Nonaudit Services and Earnings Management in the Pre-SOX and Post-SOX Eras
    Practical Implications:

    The observed decline in NAS over the period 2000-2005 provides a demarcation of situations in the pre-SOX period where auditor independence was potentially more or less impaired, either because of the presence of specific NAS that was considered harmful or because general economic dependence had adverse effects on auditor independence, or both. In contrast to the concern that NAS-based incentives led auditors to overlook overstatements by companies, they may have led them to allow downward earnings management.

    For more information on this study, please contact Jayanthi Krishnan.

    Citation:

    Krishnan, J., L. Su, and Y. Zhang. 2011. Nonaudit Services and Earnings Management in the Pre-SOX and Post-SOX Eras. Auditing: A Journal of Practice & Theory 30 (3):103-123. 

    Keywords:
    nonaudit services; earnings management; Sarbanes-Oxley Act
    Purpose of the Study:

    Concerns about the impact of auditor-provided nonaudit services (NAS) on auditor independence arise because of (1) auditors' economic dependence on their clients, and (2) some specific types of NAS, which the Securities and Exchange Commission (SEC) argues can harm auditor objectivity. The SEC's prohibition in 2003 of specific kinds of NAS led to a significant decline in NAS between 2000-2001 and 2004-2005. This paper argues that this decline in observed NAS fees can be used to identify firms that had a greater likelihood of impaired auditor independence in the pre-SOX period. 

    Design/Method/ Approach:

    The authors used performance-adjusted discretionary accruals (PPDA) to estimate parameters in their model, which tested the effect of non-audit fee change and its interactive effect with SOX on earnings management. With data on auditor fees from the Audit Analytics database for years 2000, 2001, 2004, and 2005, the process yielded a final sample of 1,768 unique firms and 7,072 observations after deleting unrelated cases.

    Findings:

    The authors expected that firms with greater declines would show greater earnings management in the pre-SOX period, and this difference to be eliminated in the post-SOX period. The results are consistent with these expectations. However, the results reported hold only for negative discretionary accruals. That is, any impairment of auditor independence resulting from NAS is observed only for downward earnings management. Thus, it seems likely that income-increasing earnings management is not associated with NAS, possibly because litigation concerns counterbalance any incentives for impaired independence. For downward earnings management, litigation concerns are less acute, and that may explain the results. The results hold when the authors control (in sensitivity tests using a smaller sample) for the effectiveness of the audit committee.

    Category:
    Auditor Judgment, Independence & Ethics
    Sub-category:
    Individual & team conduct (e.g. premature signoff - underreporting hours)

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