Academic journal article Auditing: A Journal of Practice & Theory

The Impact of Pressure from Potential Client Business Opportunities on the Judgments of Auditors across Professional Ranks

Academic journal article Auditing: A Journal of Practice & Theory

The Impact of Pressure from Potential Client Business Opportunities on the Judgments of Auditors across Professional Ranks

Article excerpt

INTRODUCTION

In this paper, we examine the effects of incentives in the form of additional business opportunities on auditors' inventory obsolescence judgments. While client service can take many forms (e.g., obtaining the client's respect and confidence, providing good service, presenting management letter recommendations) (Emby and Etherington 1996), we focus on one aspect of client service that involves providing new or expanded business services to existing clients. As the market for audit services becomes more competitive, generating additional business services has become increasingly important to a firm's profitability (Cohen and Trompeter 1998). Therefore, the presence of incentives for additional business services may put pressure on the auditor's judgment to support client-preferred reporting methods (Hackenbrack and Nelson 1996; DeZoort and Lord 1997). However, an auditor's role as an impartial evaluator of financial statements (Advisory Panel on Auditor Independence 1994), the perceived threat of litigation (Arthur Andersen et al. 1993), and the AICPA code of professional conduct on maintaining objectivity (e.g., AU section 55.03) may discourage their agreement with client preferences. Therefore, an increased understanding of pressures that cannot be eliminated in audit practice, such as incentives for additional business, could lead to strategies to mitigate pressure effects such as additional training about complex trade-offs (DeZoort and Lord 1997).

Prior research suggests that lower rank auditors may be susceptible to pressures from within and outside the organization. For example, studies indicate that obedience and time pressures from within a firm influence lower rank auditors' (staff and seniors) willingness to sign-off on materially misstated accounts and underreport time (e.g., Kelly and Margheim 1990; McDaniel 1990; Ponemon 1992; Lord and DeZoort 2001). Audit fee pressure and client-based incentives from outside a firm (e.g., client retention) have also been found to impact lower rank auditors' budgeting behavior and willingness to accept a client-preferred reporting method (e.g., Hackenbrack and Nelson 1996; Houston 1999). These findings suggest that pressures confronting lower rank auditors can have deleterious effects on audit judgment and are consistent with psychology research indicating that decision makers' judgments may be biased in a manner consistent with their incentives (Fiske and Taylor 1991; Bazerman et al. 1997). In addition to technical skills and professional judgment, recognizing opportunities for generating additional services is a component of lower rank auditors' performance evaluations and is emphasized in the socialization process in public accounting (e.g., Covaleski et al. 1998). Therefore, in the presence of additional business opportunities, lower rank auditors may have difficulty prioritizing this pressure vis-a-vis others and could thus support a client's preference in an attempt to enhance client relations.

Since generating additional services is obviously an important component of the performance evaluations of higher rank auditors (Emby and Etherington 1996), it may appear that higher rank auditors would be influenced more by the presence of additional business opportunities than lower rank auditors. However, research suggests that higher rank auditors have greater tacit management skills that may allow them to balance the competing goals they confront in the audit (e.g., legal liability risk vs. additional business opportunities) (Tan and Libby 1997; Steinberg and Horvath 1999). That is, their tacit knowledge may allow higher rank auditors to consider task and contextual factors when faced with various pressures. For example, studies have shown that experienced auditors are not influenced by client pressure when there is concern for legal liability or when all available accounting precedents indicate the same treatment (e.g., Trompeter 1994; Salterio 1996). …

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