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    The Effects of Prior Auditor Involvement and Client Pressure...
    research summary posted September 26, 2013 by Jennifer M Mueller-Phillips, tagged 09.0 Auditor Judgment, 09.01 Audit Scope and Materiality Judgments, 10.0 Engagement Management, 10.04 Interactions with Client Management 
    The Effects of Prior Auditor Involvement and Client Pressure on Proposed Audit Adjustments
    Practical Implications:

    Regulators and investors are concerned that conflicts of interest between auditor and client may result in material adjustments that are waived when they should be proposed.  As a result, certain regulations have been implemented to prevent that conflict (i.e., SOX).  This research indicates that auditors may still favor client preferences when possible. Therefore, the reforms of SOX may not have been sufficient.
    The authors also note that this study mirrors what might result in an audit partner or audit firm rotation in that proposed adjustments are higher when the auditor had no involvement in waiving the prior period adjustments.  The authors state that audit firm rotation is expected to be costly and have a number of other negative consequences.  However, they also note their results show benefits to not having that prior involvement and thus some of the benefits of audit firm rotation (e.g., less conflict of interest/client pressure) could be attained by audit partner rotation. 
    For more information on this study, please contact Richard C. Hatfield.


    Hatfield, R. C., S. B. Jackson, and S. D. Vandervelde. 2011. The Effects of Prior Auditor Involvement and Client Pressure on Proposed Audit Adjustments. Behavioral Research in Accounting 23 (2):117-130

    audit adjustments; prior auditor involvement; client pressure
    Purpose of the Study:

    Prior research indicates that prior client-related decisions can influence an individual’s current year decisions.  The purpose of this study is to look at how prior decisions related to waived audit adjustments impact current year proposed audit adjustments.  This is important since individuals might not fully correct prior year adjustments in the current year since it could result in an admission of prior judgment errors. Further, this study tests whether client pressure further exasperates the situation by evaluating auditors in situations where client pressure is higher or lower.  Prior research finds that auditors unknowingly tend to make judgments closer to their client’s wishes in higher pressure situations. SOX was designed to decrease this likelihood.  This study evaluates a post-SOX sample to examine whether auditors are more likely to resist these pressures. 

    Design/Method/ Approach:

    The author conducted an experiment including auditors of the senior associate, manager, and partner ranks prior to November 2011.  The experiment manipulated both client pressure (high and low) and involvement on this client’s prior year audit adjustment (waived prior year adjustment or not involved in the waiving of the prior year adjustment).  Auditors were then asked to propose an audit adjustment for allowance for bad debts. 

    • The authors find that auditors who were not involved in the waiving of a prior period immaterial adjustment propose adjustments that are significantly larger than auditors who had waived the prior period adjustment. 
    • The authors also find that auditors propose smaller adjustments when client pressures are higher (i.e., larger audit client and CFO that is opposed to making the full adjustment). 
    • However, the authors find no evidence to suggest that prior involvement causes even smaller in proposed adjustments when client pressure is higher. 
    Auditor Judgment, Engagement Management
    Audit Scope & Materiality Judgements, Interactions with Client Management