Academic journal article Auditing: A Journal of Practice & Theory

The Impact of Retention Incentives and Client Business Risks on Auditors' Decisions Involving Aggressive Reporting Practices

Academic journal article Auditing: A Journal of Practice & Theory

The Impact of Retention Incentives and Client Business Risks on Auditors' Decisions Involving Aggressive Reporting Practices

Article excerpt

The business community, including the accounting profession, has long been aware that corporate managers may be creative in their use of accounting tactics to manipulate financial figures. In recent years, regulatory agencies and researchers have paid significant attention to aggressive financial reporting. In this study, an aggressive reporting practice is defined as a method, adopted by the client and accepted by the auditor, that portrays the client's financial situation more favorably than the facts would support. Incidents of this type may occur on audit engagements when definitive, authoritative guidance does not exist and significant professional judgment is required. Given the ambiguity present in such situations, an auditor may find it difficult to reject a client's reporting proposal if its accounting treatment is not in direct violation of existing accounting standards.

In this research study, 55 audit seniors and managers from all of the Big 5 accounting firms were provided a realistic case where a client proposed an aggressive reporting treatment (the disclosure only of a material receivable where collectibility was uncertain). …

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