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  • Jennifer M Mueller-Phillips
    U.S. Audit Partner Rotations
    research summary posted June 26, 2017 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 05.03 Partner Rotation in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    U.S. Audit Partner Rotations
    Practical Implications:

    This study helps to inform about the effects of audit partner rotations. The evidence suggests that partner rotation does add a fresh look at U.S. audit engagements. The results can also be applied to the U.S. debate over audit firm rotation. It demonstrates that firm rotation is not the only way to add a fresh look to audit engagements and that the current system of audit partner rotation already has a measurable effect.

    Citation:

    Laurion, Henry, A. Lawrence, and J. Ryans. 2017. “U.S. Audit Partner Rotations”. The Accounting Review. 92.3 (2017): 209. 

    Keywords:
    U.S. audit partner rotations; fresh look; restatements; valuation allowances and reserves; write-downs; special items
    Purpose of the Study:

    Currently, the SEC requires that lead partners rotate off an audit engagement after five years and then sit out another five years before returning to the audit engagement. The audit partner rotation requirement was put into place to add renewed professional skepticism and a fresh insight into the audit. Previous studies in the United States generally indicate that partner rotation decreases audit quality due to a loss of client-specific knowledge and expertise. This paper adds to the discussion by examining the incidence of restatements, write-downs, and special items, as well as changes in valuation allowances and reserves surrounding partner rotation.

     

    Design/Method/ Approach:

    The authors identified audit partner rotations by using SEC comment letter correspondences for issuers who have received comment letter reviews in two consecutive years that copy different audit partners for each of those years. The information was gathered using the Audit Analytics Comment Letter database and comprised of 205 U.S. partner rotations at 189 SEC public companies from 2006 to 2014. A difference-in-differences model was used to compare the before and after results against a non-rotating firm control group. 

    Findings:

    The authors find the following:

    • There is no change in the frequency of misstatements after a partner rotation.
    • However, restatement discoveries and restatement announcements display relative increases of 5.9% and 5.1% respectively after there is a new lead partner. This suggests that the audit partner rotation requirement does in fact increase audit quality.
    • Additionally, there is some evidence of decreases in positive special items.
    Category:
    Audit Quality & Quality Control, Audit Team Composition, Independence & Ethics
    Home:

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

  • Jennifer M Mueller-Phillips
    Does Charismatic Client Leadership Constrain Auditor...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 09.01 Audit Scope and Materiality Judgments in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Does Charismatic Client Leadership Constrain Auditor Objectivity?
    Practical Implications:

    The potential threat of constrained auditor objectivity due to charismatic leadership is one that has not previously been addressed before. Therefore, auditors should be proactive in making sure they are aware of this threat while working on various audit engagements. Additionally, audit firms should pay attention because it is unlikely that there are any mitigating strategies in place to combat the threat within the firm. 

    Citation:

    Svanberg, Jan, and P. Ohman. 2017. “Does Charismatic Client Leadership Constrain Auditor Objectivity?”. Behavioral Research in Accounting. 29.1 (2017): 103.

    Keywords:
    auditing; auditor objectivity; charismatic client leadership; client identification
    Purpose of the Study:

    An auditor’s objectivity can be negatively affected by various financial or social characteristics of the client. This study examines whether or not auditor objectivity is constrained by perceived charismatic leadership of management. The initial assumption is that perceived charismatic client leadership will in fact negatively affect auditor objectivity. This threat is particularly concerning because it can rapidly materialize and is unable to be addressed by auditor rotation. Previous studies have focused on the financial size of clients as an indicator of possible problematic relationships between the auditor and client. If the initial assumption in this study is correct than this will suggest that charismatic leadership plays a role in auditor objectivity along with the financial size of the firm. 

    Design/Method/ Approach:

    The sample consists of 1,000 Swedish auditors randomly selected using a Revisorsnamnden register. There was a 19.9% response rate to a questionnaire that was sent out on September 2013. The majority of respondents were male partners or managers. The questionnaire was a cross-sectional survey where auditors were asked to recall their largest client’s leader, and then to assess the extent to which the leader is charismatic. A regression model was then used to test the hypothesis.

    Findings:

    Overall, the authors find that there is a positive relationship between constrained auditor objectivity and the extent to which the auditor perceives the client leaders as charismatic. This suggests that client identification is not necessarily the only social factor leading to constrained objectivity.     

    Additionally, the authors find the following:

    • Stronger levels of professional identification are not associated with more objective judgment.
    • Auditors for Big 4 firms are more objective when compared to auditors in smaller audit firms.
    Category:
    Auditor Judgment, Independence & Ethics
    Sub-category:
    Prior Dispositions/Biases/Auditor state of mind
    Home:

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

  • Jennifer M Mueller-Phillips
    Trust and Professional Skepticism in the Relationship...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 08.04 Auditors’ Professional Skepticism in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Trust and Professional Skepticism in the Relationship between Auditors and Clients: Overcoming the Dichotomy Myth
    Practical Implications:

    The findings from this study have direct implications for practitioners and policy makers. Current legislation efforts separate the auditor from the client and are not effective in raising the client’s perception of professional skepticism. Instead, the authors propose regulators giving auditors and clients sufficient leeway to establish identification-based trust.

    Citation:

    Aschauer, Ewald, et al. “Trust and Professional Skepticism in the Relationship between Auditors and Clients: Overcoming the Dichotomy Myth.” Behavioral Research in Accounting 29.1 (2017): 19.

    Keywords:
    auditing; trust; professional skepticism; coexistence
    Purpose of the Study:

    Professional skepticism is a key attribute for an auditor to have. Broadly, this study examines how the relationship between auditors and client managers affect professional skepticism. Specifically, if an auditors’ identification-based trust causes the client to view the auditor as having higher or lower professional skepticism. The authors in this paper define identification-based trust as interpersonal trust. Research in prior studies have reached different conclusions regarding the effects of identification-based trust on professional skepticism, so it is somewhat of a contested subject.

    Design/Method/ Approach:

    There were two studies that took place. In Study 1 the authors sent emails to selected auditors, managers and partners, inviting them to be interviewed for the research project along with their clients. Both the auditors and corresponding clients were interviewed separately about the general mechanisms of their relationship. The purpose of this study was to develop a hypothesis.

    In Study 2 the authors contacted 6,500 auditors in Germany by phone encouraging them to take a survey with their clients. The final sample size was comprised of 233 auditor/client groups. The auditors and clients were sent questionnaires and the data collected from the results were analyzed through an ordinary least squares regression.

     

    Findings:

    The overall finding of this study is that auditors’ identification-based trust in their clients is positively related to the clients’ perceptions of the auditors’ professional skepticism.

    The authors find:

    • Auditors may feel uncomfortable about this identification-based trust and compensate by increasing their professional skepticism.
    • Identification-based trust improves the information exchange between auditor and client which leads to a higher perception of professional skepticism by the client.
    • Identification-based trust reduces opportunism in the auditing process and allows for there to be more efficiency in areas such as negotiation.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Independence & Ethics
    Sub-category:
    Auditors’ Professional Skepticism
    Home:

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

  • 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 in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    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
    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 in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    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
  • Jennifer M Mueller-Phillips
    Whistleblowing in Audit Firms: Do Explicit Protections from...
    research summary posted November 15, 2016 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 in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Whistleblowing in Audit Firms: Do Explicit Protections from Retaliation Activate Implicit Threats of Reprisal?
    Practical Implications:

    This experiment illustrates the fact that organizations should carefully craft their whistleblower hotline policies so as to minimize the salience of retaliation risk. For example, instead of describing explicit protections from retaliation, the organization could explicitly describe the its commitment to ethical behavior. Furthermore, organizations may wish to publicize successful instances of employee whistleblowing as a means of increasing the availability of instances in which whistleblower retaliation did not occur.

    Citation:

    Wainberg, J. and S. Perreault. 2016. Whistleblowing in Audit Firms: Do Explicit Protections from Retaliation Activate Implicit Threats of Reprisal? Behavioral Research in Accounting 28 (1): 83-93. 

    Keywords:
    whistleblowing, corporate governance, vividness congruency theory
    Purpose of the Study:

    Whistleblower hotlines are becoming increasingly important in audit firms since auditors are generally viewed as the first line of defense against corporate malfeasance; however, surveys consistently indicate that a substantial number of employees who witness misconduct still choose not to report. Workplace retaliation is the primary reason that individuals are fearful of reporting any wrongdoing that they witness. This is not an irrational fear, as there have been numerous well-publicized examples of lives and careers that have been irreparably damaged as a result of whistleblower retaliation. Consequently, the Association of Certified Fraud Examiners has begun recommending that organizations specifically emphasize anti-retaliation protections offered to employees in addition to basic assurances of confidentiality and anonymity. These specific protections are intended to encourage whistleblowing reporting, but the vividness congruency theory suggests that the inclusion of these protections in whistleblower hotline descriptions may actually inhibit such reporting due to the fact that such explicit protections may activate fearful imagery that is incongruent with the message of protection being offered. 

    Design/Method/ Approach:

    The authors created an experiment in which graduate level students enrolled in an auditing course participated.  

    Findings:
    • The authors find that the inclusion of explicit protections from specific forms of retaliation can lead to an increase in the salience of such threats, thereby significantly lowering the likelihood that the misconduct will be reported through whistleblower hotlines.
    • The authors find that, rather than diminishing the fear of retaliation, auditors’ perceptions of reporting risk were intensified by the presence of explicit protections in the hotline policy. 
    Category:
    Corporate Matters, Independence & Ethics
    Sub-category:
    Corporate Whistle Blowers, Reporting Ethics Breaches - Self & Others
  • Jennifer M Mueller-Phillips
    Antecedents to Unethical Corporate Conduct: Characteristics...
    research summary posted November 15, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.04 Moral Development and Individual Ethics Decisions, 04.06 Reporting Ethics Breaches – Self & Others in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Antecedents to Unethical Corporate Conduct: Characteristics of the Complicit Follower
    Practical Implications:

    The findings from these two studies illustrate that the susceptible follower problem associated with these characteristics is pervasive, influencing two steps within the ethical decision-making process. Furthermore, the results suggest that more than one in ten individuals are vulnerable in ethical dilemmas.  

    Citation:

    Mowchan, M., D. J. Lowe and P. M. J. Reckers. 2015. Antecedents to Unethical Corporate Conduct: Characteristics of the Complicit Follower. Behavioral Research in Accounting 27 (2): 95-126. 

    Keywords:
    ethics, toxic triangle, impulsivity and proactivity.
    Purpose of the Study:

    Despite the importance of ethical conduct in the accounting profession, many scandals in recent years have worked to shake public confidence in the ethics of the profession. Although the companies themselves, as well as members of the executive team, are often blamed for fraud, complicit fraudulent conduct by lower ranking accounting employees was also found in wrongdoing companies. Some court cases claim that if lower level staff accountants had refused to do as their supervisors asked and blown the whistle on the request, fraud could have been stopped entirely. Because of this, examining the characteristics of individuals at all levels of an organization to determine their impact on ethical conduct is important. The bulk of existing research has examined destructive leaders; very little research has centered on complicit followers. As such, the focus of this research is on complicit followers and, specifically, on three individual follower characteristics: impulsivity, authoritarianism/conventionalism, and proactivity. 

    Design/Method/ Approach:

    Two quasi-experiments were conducted among two separate groups of graduate accountancy students. 

    Findings:
    • The data show significant variations in the levels of these characteristics among master’s student participants.
    • The authors find that two of the characteristics individually, as well as two of the three interactions, have significant associations with intention for unethical complicity among subordinates and the ability to correctly identify ethical dilemmas in various accounting accruals earnings management and real earnings management contexts.
    • The authors find that low authoritarianism and high impulsivity, individually, lead to greater intention for unethical complicity among followers and reduced ability to identify ethical dilemmas.
    • The results reveal that individuals who are both low in authoritarianism and high in impulsivity are most willing to comply with supervisors’ requests for compliant misconduct and least able to identify ethical dilemmas.
    • The results reveal that willingness to resist requests for complicity in unethical conduct is strongest among individuals who are high in authoritarianism and high in proactivity.
    • The results reveal that the ability to identify ethical dilemmas is strongest among individuals who exhibit high authoritarianism and low proactivity.
    Category:
    Independence & Ethics
    Sub-category:
    Moral Development and Individual Ethics Decisions, Reporting Ethics Breaches - Self & Others
  • Jennifer M Mueller-Phillips
    Did the PCAOB’s Restrictions on Auditors’ Tax Services Imp...
    research summary posted September 13, 2016 by Jennifer M Mueller-Phillips, tagged 01.0 Standard Setting, 01.06 Impact of PCAOB, 04.0 Independence and Ethics, 04.03 Non-Audit Services in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Did the PCAOB’s Restrictions on Auditors’ Tax Services Improve Audit Quality?
    Practical Implications:

     This study serves the purpose of examining the PCAOB’s role as overseer of public company auditing, while separating from previous studies by targeting the PCAOB’s restrictions on auditors’ tax services, which have not been examined in the past. This study also examines whether APTS pose a threat to audit quality but again differentiates itself from previous literature by focusing on only the tax services that the PCAOB chose to ban and by utilizing the difference-in-differences design to address the limitation of the cross-sectional approach utilized by other studies in the past. After reviewing these findings, it is possible that the PCAOB restrictions did not fully accomplish their objective.

    Citation:

     Lennox, C. S. 2016. Did the PCAOB’s Restrictions on Auditors’ Tax Services Improve Audit Quality? The Accounting Review 91 (5): 1493-1512.

    Keywords:
    PCAOB, audit quality, and auditors’ tax services.
    Purpose of the Study:

    In 2005, the Permanent Subcommittee on Investigations of the U.S. Senate reported that audit firms were selling potentially abusive or illegal tax-planning strategies to audit clients and their top executives on a contingent fee basis. This concerned regulators for many reasons; consequently, the PCAOB adopted three new rules to address these potential threats to audit quality. First, Rule 3521 reaffirms the ban on contingent fees that existed under Rule 302 of the American Institute of Certified Public Accountants’ Code of Professional Conduct. Second, Rule 3522 bars audit firms from selling aggressive tax services to audit clients. Finally, Rule 3523 forbids audit firms from selling tax services to executives in a financial reporting role. These three rules became effective from October 31, 2006 onward. The PCAOB stated that the rules were intended to improve audit quality, and, by extension, the quality of financial reporting. The purpose of this study is to test whether the restrictions met this objective.

    Design/Method/ Approach:

    Because audit quality is not directly observable the author focuses on accounting misstatements, both misstatements that are tax-related and other types, and the issuance of going-concern opinions. The author separates companies into groups based upon the reduction of APTS purchases between July 26, 2005 and October 31, 2006. He then compares the differences in misstatements and going-concern opinions between the treatment and control groups and tests whether these differences change after the PCAOB imposed the restrictions on auditors’ tax services. 

    Findings:
    • The author finds that in the period before the restrictions, there is no difference in the incidence of going-concern opinions between the treatment and control companies; however, the treatment companies are more likely than the control companies to have accounting misstatements and tax-related misstatements. This supports the premise of regulators that the treatment companies had lower-quality auditing before the restrictions were introduced. 
    • The author finds no significant changes in misstatements, tax-related misstatements, or going-concern opinions subsequent to the APTS restrictions after using a difference-in-differences research design. In fact, the treatment companies continue to have significantly more accounting misstatements and more tax-related misstatements in the period subsequent to the APTS restrictions.
    • The author finds large and highly significant reductions in APTS fees when the restrictions were introduced. 
    Category:
    Independence & Ethics, Standard Setting
    Sub-category:
    Impact of PCAOB, Non-audit Services
  • Jennifer M Mueller-Phillips
    The Institutionalization of Commercialism in the Accounting...
    research summary posted August 31, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.02 Impact of Fees on Decisions by Auditors & Management in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Institutionalization of Commercialism in the Accounting Profession: An Identity-Experimentation Perspective
    Practical Implications:

    This paper synthesizes many theories of institutional experimentation and identifies work for advancing the understanding of commercialism in the accounting profession. It also contributes through the explication of identity experimentation as a key mechanism used by the accounting profession to institutionalize commercialism. The paper works to demarcate boundary work and practice work as two different types of identity experimentation. Finally, the paper delineates the difference between deriving an auditor identity from audit practice and deriving expert work from a versatile expert identity.

    Citation:

    Guo, K. 2016. The Institutionalization of Commercialism in the Accounting Profession: An Identity-Experimentation Perspective. Auditing: A Journal of Practice and Theory 35 (3): 99-118.

    Keywords:
    professionalism, commercialism, institutional work, institutional experimentation, identity experimentation, institutional logic
    Purpose of the Study:

    As the system of accounting stands today, auditors are hired by clients for a fee to examine and opine on their financial reports while maintaining independence from the client; however, it follows that the independence of the auditor could be questioned due to the financial dependence of the auditor on the client. In fact, many are beginning to believe that auditors have become more commercialistic (serving economic self-interest) than professional (serving the public interest) as a result of deregulation in the professional services area. The author chooses to investigate how the accounting profession, collectively, has become more committed to commercialism in the recent decades. The author separates his work from the work of previous researchers by truly focusing on the collective identity of the profession by developing an identity-experimentation framework. 

    Design/Method/ Approach:

    To develop the identity-experimentation framework, the author reviewed and synthesized many relevant studies in the accounting and management literature. Furthermore, he utilizes recent cases as examples to highlight the accounting profession’s efforts to institutionalize commercialism. 

    Findings:
    • The framework highlights two key identity-experimentation strategies: boundary work and practice work.
    • Boundary work has two different forms.
      • The first involves making identity claims about auditor expertise and traits and largely focuses on how auditor expertise and traits can claim to help achieve pragmatic ends.
      • The second involves the redefinition of the auditor boundary.
    • Practice work involves the creation of an expert-work identity; by reinventing the audit and tailor-making expert work for versatile experts, the accounting profession aims to achieve the taken-for-grantedness of “versatile experts doing expert work.”
    • The author finds that identity experimentation in the accounting profession can be viewed as an ongoing and trial-and-error process that involves what is termed as “constant jockeying” and aims to “fashion shared meanings and identities.”
    Category:
    Independence & Ethics
    Sub-category:
    Impact of Fees on Decisions by Auditors & Management
  • Jennifer M Mueller-Phillips
    The Influence of Mood on Subordinates’ Ability to Resist C...
    research summary posted August 30, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.04 Moral Development and Individual Ethics Decisions, 05.0 Audit Team Composition, 05.04 Staff Hiring, Turnover and Morale, 11.0 Audit Quality and Quality Control, 11.03 Management/Staff Interaction in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    The Influence of Mood on Subordinates’ Ability to Resist Coercive Pressure in Public Accounting
    Practical Implications:

     This study should give pause to investors, auditors and regulators about the potential willingness of subordinate auditors to acquiesce to a superior’s unethical request. As such, the accounting profession should make sure to have a better understanding of the nature of and solutions to the problem such as changes in firm/team culture, personnel placement, etc. Additionally, audit firms can better use this information to understand which employees may be most susceptible to such negative influence and preempt such events.

    Citation:

     Johnson, E. N., D. J. Lowe, and P. M. Reckers. 2016. The Influence of Mood on Subordinates’ Ability to Resist Coercive Pressure in Public Accounting. Contemporary Accounting Review 33 (1): 261-287.

    Keywords:
    Affect, Mood States, Unethical Acts, Obedience Pressure, Superior-Subordinate Relationships
    Purpose of the Study:

    This study examines the relationship between subordinate auditors’ various affective states (i.e. mood/emotion) and their effect on auditors’ willingness to comply with a superiors’ unethical directive in six common auditing scenarios.  The authors also employ more real-world event triggers and scenarios compared with previous research.  This study seeks to better refine and test the broad constructs of mood used in previous research.

    Design/Method/ Approach:

    Sample: 118 audit seniors from two large international public accounting firms

    Experiment: Create a broad distribution of arousal, fear and insignificance among participants by manipulating two aspects of the audit client CEO (high/low dominance and high/low prestige) and one aspect of the auditor (above/below average work-life history).

    Analyses: 2x2x2 between subjects ANOVA using median splits on each measured variable: fear, insignificance and arousal

    Findings:

    Regardless of affective state manipulations, the audit seniors express a high level of willingness to comply with a superiors’ unethical direction.  However, this willingness to comply is increased when auditors are made to feel more insignificant (i.e. weak/low power position relative to others) and fearful (i.e. elevated uncertainty and lower perceptions of control regarding future events and circumstances) but decreased when auditors are in an active, positive mood state (i.e. arousal).  Interestingly, these results obtain despite significant doubt by the firms’ senior management who reviewed the task that any of their subordinates would express willingness to engage in such behavior.  As such, auditors may be more willing to engage in or overlook unethical behavior than previously thought.  

    Category:
    Audit Quality & Quality Control, Audit Team Composition, Independence & Ethics
    Sub-category:
    Management/Staff Interaction, Moral Development and Individual Ethics Decisions, Staff Hiring - Turnover & Morale