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  • Jennifer M Mueller-Phillips
    Auditor Quality and Debt Covenants
    research summary posted June 26, 2017 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control, 14.0 Corporate Matters 
    Title:
    Auditor Quality and Debt Covenants
    Practical Implications:

    This paper contains important applications for borrowing firms wanting to have more favorable loan contract terms. By hiring a high-quality auditor this decreases risks for the creditors and therefore oftentimes reduces the stringency of debt covenants. Subsequently, the borrowing firm will violate the debt covenants less.

    Citation:

    Robin, Ashok, Q. Wu, and H. Zhang. 2017. “Auditor Quality and Debt Covenants”. Contemporary Accounting Research 34.1 (2017): 154.

    Purpose of the Study:

    Debt covenants are in place to help mitigate information asymmetry and agency problems between lender and borrower. This study examines whether high-quality auditors decrease the lenders’ demand for strict covenants (contracting effect), therefore reducing the likelihood of covenant violations (violation reduction effect). The assumption is that the information provided by a high-quality auditor would lower information asymmetry and agency problems, and consequently there would be no reason for strict debt covenants. 

    Design/Method/ Approach:

    There was a sample of 35,181 observations from 1996-2007. Compustat was used to gather annual covenant-violation data and Deal Scan was used to gather U.S. loan facility information.  The authors used an ordinary least squared (OLS) regression model in the analysis.

    Findings:

    Overall, the authors find high-quality audits are in fact related with fewer and looser covenants in debt contracts.

    Specifically, the authors find the following:

    • As auditor quality increases the probability of financial covenant violations decrease. The probability is 1.45% lower for firms audited by industry experts and about 4.98% lower for firms audited by the Big 4.
    • High-quality auditors play a role in mitigating the adverse effect of covenant violations on corporate borrowing costs.
    Category:
    Audit Quality & Quality Control, Corporate Matters
    Home:

    http://commons.aaahq.org/groups/e5075f0eec/summary

  • Jennifer M Mueller-Phillips
    Inferring Remediation and Operational Risk from Material...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 14.0 Corporate Matters 
    Title:
    Inferring Remediation and Operational Risk from Material Weakness Disclosures
    Practical Implications:

    This study makes important contributions regarding management’s disclosure of material weakness deficiencies. Currently, only audit-related risks are required to be addressed in material weakness deficiency disclosures. However, this study indicates that nonprofessional investors also take non-audit-related risks into consideration when making a financial reporting risk assessment. Managers do have the discretion to provide information about non-related audit risks through nonaudited disclosures. The authors suggest that in doing so managers can mitigate investors’ negative reaction the material weakness from lack of communication.

    Citation:

    Asare, S. K., and A. M. Wright. 2017. Inferring Remediation and Operational Risk from Material Weakness Disclosures. Behavioral Research In Accounting

    Keywords:
    material weakness; financial reporting risk; mediation analysis; investors’ judgments
    Purpose of the Study:

    Material weakness disclosures, entity-level and account-specific, have a negative impact on nonprofessional investors financial reporting risk assessments. The authors define financial reporting risk as “an investor’s exposure to loss as a result of relying on audited financial reports generated from an ineffective ICOFR” for the purpose of the study. Prior studies have indicated that nonprofessional investors assess a higher financial reporting risk for entity-level material weakness disclosures compared to account-specific. Broadly, the primary purpose of this study is to examine audit-related and non-audit-related risks in explaining the relationship between the type of material weakness and the investor financial reporting risk assessment. The audit-related risks are as follows:

    • Information risk is the pre-audit potential for financial misstatements due to the material weakness.
    • Verification risk is the auditor’s ability to audit around the material weakness.

     

    The non-audit-related risks are as follows:

    • Remediation risk is management’s ability to remediate the weakness.
    • Operational risk is management’s loss of operational effectiveness do to the material weakness.

     

    Special attention in this paper is given to the relational effects between non-audit-related risks resulting from material weakness disclosures and nonprofessional investors financial reporting risk assessment.

    Design/Method/ Approach:

    The 181 participants in the study were all nonprofessional investors. Each participant received the following from a hypothetical company: general financial information, an audit report, and an adverse opinion on ICOFR, either on an entity-level or account-specific material weakness. Then participants were asked to evaluate the investment’s attractiveness and respond to several questions involving audit-related and non-audit-related risks. The authors used mediation analysis to evaluate the results. 

    Findings:

    The authors find the following:

     

    • The type of material weakness has a direct effect on information, verification, remediation, and operational risks. Nonprofessional investors consider entity-level material weaknesses as presenting higher audit-related and non-audit related risks compared to account-specific material weaknesses.
    • Subsequently, these higher audit-related and non-audit related risks directly cause the nonprofessional investor’s assessment of financial reporting risk to increase.
    • Thus, non-audit-related risks from material weaknesses do in fact have an impact on a nonprofessional investor’s financial reporting risk assessment.
    Category:
    Corporate Matters, Risk & Risk Management - Including Fraud Risk
    Home:

    http://commons.aaahq.org/groups/e5075f0eec/summary

  • Jennifer M Mueller-Phillips
    Corporate Sustainability Reporting and Stakeholder Concerns:...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 14.0 Corporate Matters, 15.0 International Matters, 15.05 Sustainability Services 
    Title:
    Corporate Sustainability Reporting and Stakeholder Concerns: Is There a Disconnect?
    Practical Implications:

    Sustainability is important to the accounting industry. Accountants have a responsibility to help integrate sustainability into areas such as budgets, resource allocations, and capital expenditure decisions. The evidence from this study indicates what CS activities consumer find important. Management can use this information in developing their business strategies related to CS. 

    Citation:

    Bradford, Marianne, J. B. Earp, D. S. Showalter, and P. F. Williams. 2017. “Corporate Sustainability Reporting and Stakeholder Concerns: Is There a Disconnect?”. Accounting Horizons. 31 (1): 83-102.

    Keywords:
    corporate sustainability; Global Reporting Initiative; sustainability reporting; stakeholder theory; content analysis; survey; factor analysis
    Purpose of the Study:

    There has been an increasing number of companies reporting their corporate sustainability (CS) in recent years. Traditionally, CS refers to measures companies take against environmental issues. However, in recent years it is often viewed as the balance between environmental, social, and economic outcomes, also known as the triple bottom line. This expanded definition of CS has caused companies to emphasize different outcomes, and subsequently to have vastly different CS reports. The current guidelines for CS reporting, the Global Reporting Initiative (GRI) framework, is consistently updated to account for this expanded view. Additionally, consumers are increasingly being viewed as primary stakeholder groups. This study examines whether the CS information being reported through the GRI framework is adequately addressing consumer stakeholder interests.

    Design/Method/ Approach:

    The sample contained 505 participants that responded to an online survey in 2013. The link to the survey was posted on the Institute of Management Accountants (IMA) website and also onto North Carolina State University’s website. The participants assumed the role of consumers and took the survey which contained 40 scale items and 6 demographic items.

    Findings:

    The authors find the following:

    • There is a disconnect between the dimensions that consumer stakeholder groups view as important and the GRI dimensions. The GRI based framework is broad, and therefore the reported measures may not satisfy the precise concerns that all stakeholder groups have.
    • Specifically, consumer stakeholder group consider Risk and Compliance to be of high importance. The stakeholders are concerned with the company’s ethical behavior, accountability standards, audits, and accounting policies. On the other hand, Economic activities were viewed as less important.
    Category:
    Corporate Matters, International Matters
    Sub-category:
    Sustainability ServicesTraining & General Experience
  • Jennifer M Mueller-Phillips
    Market Reaction to Auditor Ratification Vote Tally
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness 
    Title:
    Market Reaction to Auditor Ratification Vote Tally
    Practical Implications:

    This study provides empirical evidence that suggests that auditor ratification vote tallies are informative to the market. First, higher auditor ratification disapproval is associated with a more negative stock market reaction to the announcement of the vote tallies, consistent with the argument that this reflects negative investor perception of the auditor. Second, the authors provide evidence that the market reacts positively to an auditor change when there is high shareholder disapproval, and that audit and auditor characteristics moderate or exacerbate the market reaction in a way that suggests the market finds the ratification vote informative, but does not fully price it. 

    Citation:

    Tanyi, P. N. and K. C. Roland. 2017. Market Reaction to Auditor Ratification Vote Tally. Accounting Horizons 31 (1): 141 – 157. 

    Keywords:
    auditor ratification, market reaction, and corporate governance
    Purpose of the Study:

    In light of recent calls to mandate shareholder voting on auditor ratification, this paper illustrates that the ratification vote provides new information to investors. The push to mandate shareholder ratification is supported by many and is largely driven by concerns that most audit committees simply “rubber stamp” management’s recommendation of the auditor. Given that shareholder ratification votes are generally overwhelmingly in favor of the auditor, non-binding, and voluntary, the authors ask whether the market finds any new information in the ratification vote. The authors examine whether the proportion of votes against or abstaining from the appointment of the auditor has capital market consequences. They also examine whether the proportion of non-supporting votes affects how the market reacts to auditor dismissal. 

    Design/Method/ Approach:

    The authors use a sample of firm-year observations with auditor ratification votes over the period of 2010 to 2015. 

    Findings:
    • The authors find higher shareholder disapproval of the auditor is associated with a negative market reaction to the voting outcome announcement; furthermore, they find evidence that this reaction is exacerbated by known auditor or audit-related characteristics and corporate governance measures that are suggestive of high auditor quality, indicating that the market is surprised by the shareholder disapproval.
    • The authors find that the market reacts less negatively to high shareholder disapproval for clients with high non-audit fee ratios, longer auditor tenure, and accounting restatements, indicating that the market is already aware of audit independence or audit quality issues.
    • The authors find that the market responds more positively to a subsequent auditor dismissal when the proportion of shareholder votes against or abstaining from the auditor’s appointment is higher. 
    Category:
    Corporate Matters
    Sub-category:
    Audit Committee Effectiveness
  • Jennifer M Mueller-Phillips
    The Relationship between Aggressive Real Earnings Management...
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 14.0 Corporate Matters, 14.01 Earnings Management 
    Title:
    The Relationship between Aggressive Real Earnings Management and Current and Future Audit Fees
    Practical Implications:

    Prior research concerning audit fees and earnings management has focused primarily on accruals management. This article shows how the audit fee and audit risk models support auditors’ pricing behavior in a REM setting. Specifically, the results are consistent with auditors, after observing aggressive REM, increasing current audit fees to cover the cost of additional effort required to gain reasonable assurance that the financial statement are free of material misstatements and increase both current and future audit fees to cover increases in perceived business risk.     

    Citation:

    Greiner, A., M. J. Kohlbeck, and T. J. Smith. 2017. The Relationship between Aggressive Real Earnings Management and Current and Future Audit Fees. Auditing: A Journal of Practice and Theory 36 (1): 85 – 107. 

    Keywords:
    audit fees, business risk, audit risk, and aggressive real earnings management.
    Purpose of the Study:

     The authors examine whether aggressive real earnings management (REM) activities are associated with audit fees. Prior research focuses on accruals-based earnings management and suggests that auditors extract additional audit fees to cover costs associated with increased engagement risk, which includes audit risks related to the issuance of an incorrect opinion and nonaudit risk related to impaired reputation, fewer business opportunities, and the inability to collect desires and future audit fees. The distinction between accrual and real earnings management is important for auditors because the potential effects on company performance and engagement risks are different. REM alters normal firm operations, impacts current and future cash flows, imposes additional costs, and sacrifices firm value. Whether auditors charge higher fees for earnings management behavior that does not violate generally accepted accounting principles if important to study as clients continue to pursue REM to meet reporting objectives. 

    Design/Method/ Approach:

    The authors utilize a conceptual audit fee model to identify specific examples within this framework where REM is likely to increase engagement risk and thereby increase audit fees through either increased effort, a risk premium, or both. They perform further analysis to better understand the sources between aggressive REM and fees.

    Findings:
    • The authors find, overall, a positive association between aggressive REM and both current and future audit fees.
    • The authors find that changes in aggressive REM are associated with changes in fees.
    • The authors find that only current aggressive REM is positively associated with audit report delays.
    • The authors find evidence that the associations between aggressive Rem and future fees are driven by firms with higher REM incentives.
      • Further, they find that the future effect of aggressive REM is stronger among firms constrained by balance sheet bloat.
    Category:
    Corporate Matters, Engagement Management
    Sub-category:
    Audit Fees & Fee Negotiations, Earnings Management
  • Jennifer M Mueller-Phillips
    The Effect of CEO Social Influence Pressure and CFO...
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 14.0 Corporate Matters, 14.05 Earnings Targets and Management Behavior, 14.06 CFO Tenure and Experience 
    Title:
    The Effect of CEO Social Influence Pressure and CFO Accounting Experience on CFO Financial Reporting Decisions
    Practical Implications:

    This study provides direct testing of the effects of two forms of CEO social influence pressure on actual CFO’s reporting decisions. Examining such pressures improves the overall understanding of an individual’s decision to engage in dysfunctional behavior, which can inform auditors and audit committee members who provide oversight of the financial reporting process and have responsibility for mitigating the risk of financial misreporting. 

    Citation:

    Bishop, C. C., F. T. DeZoort and D. R. Hermanson. 2017. The Effect of CEO Social Influence Pressure and CFO Accounting Experience on CFO Financial Reporting Decisions. Auditing: A Journal of Practice and Theory 36 (1): 21 – 41.

    Keywords:
    accounting manipulation, chief financial officer, chief executive officer, compliance pressure, obedience pressure, social influence pressure, and accounting experience.
    Purpose of the Study:

    CFOs play critical stewardship roles related to financial reporting quality and a prominent and increasing role in accounting manipulations, particularly in conjunction with their CEO. This study examines how CEO pressure on the CFO and CFO accounting experience influence public company CFOs’ financial reporting judgments and decisions. 

    Design/Method/ Approach:

    The authors conducted an experiment involving a hypothetical CFO’s earnings manipulation decision. Using a between-subjects manipulation, they utilize three levels of CEO pressure (a control group where the CEO does not pressure the CFO, a compliance pressure group where the CEO asks the CFO to revise an estimate, and an obedience pressure group where the CEO tells the CFO to revise an estimate). 

    Findings:
    • The authors find that two different forms of CEO social influence pressure (obedience pressure and compliance pressure) are both effective in motivating some CFOs to misreport, with no significant difference between the two.
    • The authors find that the CFOs do not abdicate the financial reporting responsibility under pressure, despite predictions from the obedience theory; instead, the CFOs acknowledge that they still have ultimate responsibility.
    • The authors find an inverse relation between CFO accounting experience and revision of the initial adjustment, consistent with accounting experience empowering CFO resistance to pressure. 
    Category:
    Corporate Matters
    Sub-category:
    CFO Tenure & Experience, Earnings Targets & Management Behavior
  • Jennifer M Mueller-Phillips
    The Interplay of Management Incentives and Audit Committee...
    research summary posted November 15, 2016 by Jennifer M Mueller-Phillips, tagged 13.0 Governance, 13.05 Board/Audit Committee Oversight, 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness 
    Title:
    The Interplay of Management Incentives and Audit Committee Communication on Auditor Judgment
    Practical Implications:

    This study indicates that increasing the frequency of informal communication between the audit committee and the audit team can positively impact reporting quality, but auditors need to be sensitized to how management may exhibit undue influence and its potential to undermine audit committee effectiveness. From a practical standpoint, this study indicates that failing to consider specific expectations communicated by the audit committee can have severe consequences.

    Citation:

    Brown, J. O. and V. K. Popova. 2016. The Interplay of Management Incentives and Audit Committee Communication on Auditor Judgment.  Behavioral Research in Accounting 28 (1): 27-40.

    Keywords:
    audit committee communication, management incentives, competing preferences, source credibility and auditor judgment
    Purpose of the Study:

    Over the past two decades, the audit committee has evolved from a passive observer to a critical player in ensuring quality financial reporting. Just recently, the PCAOB approved Auditing Standard No. 16 to enhance communication between the external auditor and the audit committee in order to better facilitate the audit committee’s oversight role and improve financial reporting quality. However, despite this reform, auditors continue to harp on the importance of management’s role in corporate governance and its ability to exhibit significant influence during the audit. Consequently, the purpose of this study is to examine the interplay of management and the audit committee on auditor judgment, and whether auditor’s sensitivity to a characteristic of management, its incentive to influence the auditor, moderates the effectiveness of additional oversight by the audit committee. It is also important to examine whether auditors are effectively integrating expressed expectations voiced by the audit committee, in light of the recent passage of AS No. 16.

    Design/Method/ Approach:

    The authors administered a 2 x 2 between-subjects experiment that required audit seniors to evaluate management’s estimate for obsolete inventory. The auditors either were or were not given additional communication from the audit committee of its expectations. Management’s incentives to influence the auditor were also manipulated by varying the perceived propensity to manage earnings.  

    Findings:
    • The authors find that management’s incentives to influence the auditor not only affect the persuasiveness of management-provided information but also spill over to impact the potential benefit of additional audit committee communication on auditor judgments.
    • The authors find that when management’s incentives were lower, additional audit committee communication had no effect on auditor judgments, and auditors documented more items consistent with management’s aggressive reporting preference.
    • The authors find that when management’s incentives were higher, the additional communication of the audit committee had a significant and positive impact on auditors’ evidence evaluation and judgments, as auditors were less supportive of management’s aggressive estimate and also documented a greater proportion of evidence items consistent with the audit committee’s expressed expectations. 
    Category:
    Corporate Matters, Governance
    Sub-category:
    Audit Committee Effectiveness, Board/Audit Committee Oversight
  • Jennifer M Mueller-Phillips
    Honor Among Thieves: Open Internal Reporting and Managerial...
    research summary posted February 20, 2017 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 14.0 Corporate Matters 
    Title:
    Honor Among Thieves: Open Internal Reporting and Managerial Collusion
    Practical Implications:

    This study provides evidence that reporting openness can have the unintended effect of increasing collusion.  Recognizing that reporting openness can have a downside can help executives make more informed decisions when considering how much organizational openness they want. Furthermore, this study demonstrates that, despite increasing trust and reciprocity among managers, open internal reporting can potentially result in more managerial collusion because openness fosters greater “honor among thieves.”

    Citation:

    Evans III, J. H., D. V. Moser, A. H. Newman, and B. R. Stikeleather. 2016. Honor Among Thieves: Open Internal Reporting and Managerial Collusion. Contemporary Accounting Research 33 (4): 1375-1402.

    Purpose of the Study:

    The authors examine whether open internal reporting, in which a manager observes another manager’s communications with senior executives, increases collusion between the managers. Open internal reporting environments certainly have benefits, but they can also expose firms to collusion, which is a significant control problem for firms. For this reason, documenting how open internal reporting affects managers’ collusion is important because the related insight can help top executives decide how much internal reporting openness they want in their firm. 

    Design/Method/ Approach:

    The authors use an experiment to examine the effect of reporting openness of misreporting and collusion because an experiment allows them to control the managers’ economic incentives and also to isolate the effect of social norms on managers’ behavior.           

    Findings:
    • The authors find that agreements to collude lead to more misreporting in the open than in the closed reporting condition.
    • The authors find that individual managers were more than twice as likely to honor their agreements to misreport in the open condition, and pairs of managers colluded successfully nearly five times as often in the open condition.
    • The authors find that open internal reporting facilitated managers’ collusion, which significantly lowered firm welfare in the open reporting condition. 
    Category:
    Corporate Matters, Independence & Ethics
  • Jennifer M Mueller-Phillips
    When do employers benefit from offering workers a financial...
    research summary posted February 20, 2017 by Jennifer M Mueller-Phillips, tagged 14.0 Corporate Matters, 14.02 Corporate Whistle Blowers 
    Title:
    When do employers benefit from offering workers a financial reward for reporting internal misconduct?
    Practical Implications:

    This study helps to clarify the conditions under which employers are most likely to benefit economically from offering their workers an explicit financial reward for reporting internal misconduct. His cost-benefit analysis reveals that offering a financial reward is likely to be most cost-effective when the existing rate of whistleblowing within the firm is low and least-cost effective when it is high. Furthermore, employers who pay relatively low wages and/or whose workers have weak ethical incentives to report internal misconduct are likely to gain the most economic benefit from offering a reward. 

    Citation:

    Stikeleather, B. R. 2016. When do employers benefit from offering workers a financial reward for reporting internal misconduct? Accounting, Organizations and Society 52: 1 – 14. 

    Keywords:
    whistleblowing, reward, employee misconduct, gift wage, experimental economics
    Purpose of the Study:

    Many employers incur significant economic losses from internal misconduct, such as stealing inventory, falsifying time records, or operating equipment under the influence of drugs or alcohol. As a result, employers are attempting to find a solution to combat this misconduct. One solution that has arisen is offering workers an explicit financial reward for reporting internal misconduct; however, no consensus exists on whether or when this approach should be used. This study seeks to clarify the matter by identifying organizational factors that help determine whether an employer will benefit from offering workers a financial reward for reporting internal misconduct. Specifically, the author investigates whether the level of workers’ fixed compensation and their moral convictions influence their whistleblowing decisions and whether variation in these two key organizational factors moderates the cost-effectiveness for offering financial rewards for internal whistleblowing. 

    Design/Method/ Approach:

    To test his hypothesis, the author runs an experiment consisting of three between-subjects conditions.

    Findings:
    • The author finds that workers who observed theft blew the whistle more frequently as their fixed wage increased and as their conviction increased that employees in the workplace have a moral obligation to report internal misconduct to their employer.
    • The author finds that offering a reward had an overall positive economic effect on employer payoffs; however, he also finds that the positive difference in employer payoffs decreases as the level of wages paid to workers increases to the point that employers who offered relatively high wages obtained statistically similar payoffs in both conditions.
    • The author finds that the positive difference in employer payoffs decreases as workers report having stronger convictions that employees have a moral obligation to report internal misconduct; thus, the economic benefit of offering a reward accrues primarily to employers who offer relatively low pay and whose workers have weak moral convictions about reporting internal misconduct. 
    Category:
    Corporate Matters
    Sub-category:
    Corporate Whistle Blowers
  • Jennifer M Mueller-Phillips
    Effects of Incentive Scheme and Working Relationship on...
    research summary posted January 12, 2017 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.06 Reporting Ethics Breaches – Self & Others, 14.0 Corporate Matters, 14.02 Corporate Whistle Blowers 
    Title:
    Effects of Incentive Scheme and Working Relationship on Whistle-Blowing in an Audit Setting
    Practical Implications:

    The results of this study suggest that, while both types of incentive schemes are effective in promoting whistle-blowing behavior in the absence of close working relationships, the effectiveness of a rewarding incentive scheme is more likely to be undermined by the presence of close working relationships than a penalizing incentive scheme. 

    Citation:

    Boo, E., T. B. Ng, and P. G. Shankar. 2016. Effects of Incentive Scheme and Working Relationship on Whistle-Blowing in an Audit Setting. Auditing: A Journal of Practice and Theory 35 (4): 23 – 38. 

    Keywords:
    reward and penalty, incentive scheme, working relationship, and whistle-blowing.
    Purpose of the Study:

    Prior research shows that providing an incentive, either in the form of a reward or a penalty, can help promote whistle-blowing behavior. Other studies show that close relationships between employees can exert a negative impact on whistle-blowing behavior. An important yet unanswered question is whether and to what extent the effectiveness of different types of incentive schemes to promote whistle-blowing could be undermined by the presence of close working relationships likely to be forged among team members in audit firms and other organizations. Furthermore, the current incentive system in the auditing profession is dominated by penalties; however, many are calling for a shift toward incorporating more ways to reward auditors rather than penalize them, suggesting the importance of understanding the implications of alternative incentive systems. Also, there has not been much research done on the effectiveness of punitive schemes, despite their prevalence in the profession. Finally, whistle-blowing has been found to be a significant means by which frauds and other forms of misconduct are detected, which suggests the crucial importance of understanding factors that could enhance or undermine its effectiveness. 

    Design/Method/ Approach:

    The authors conduct an experiment involving 90 auditors from a Big 4 firm in Singapore. The participants are presented with a hypothetical scenario in which an audit manager encountered a wrongdoing by the engagement partner who allowed the client to materially misstate sales revenue, and assess their propensity to report the act through the firm’s whistle-blowing hotline after making no headway despite having voiced concerns to the partner. 

    Findings:
    • The authors find that a rewarding incentive scheme, relative to the control group, increases auditors’ whistle-blowing propensity in the absence, but not in the presence, of a close working relationship.
    • The authors find that a penalizing incentive scheme increases auditors’ whistle-blowing propensity regardless of the presence of a close working relationship.
    • The authors find that auditors’ whistle blowing propensity is reduced by the presence of a close working relationship in the rewarding incentive scheme, but not in the penalizing incentive scheme or the control group. 
    Category:
    Corporate Matters, Independence & Ethics
    Sub-category:
    Corporate Whistle Blowers, Reporting Ethics Breaches - Self & Others

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