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    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 
    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.


    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.

    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.

    • 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.
    Engagement Management, Independence & Ethics
    Budgeting & Audit Time Management, Individual & team conduct (e.g. premature signoff - underreporting hours)