Academic journal article Academy of Accounting and Financial Studies Journal

The Effects of Conflicting Messages on Audit Accuracy and Efficiency

Academic journal article Academy of Accounting and Financial Studies Journal

The Effects of Conflicting Messages on Audit Accuracy and Efficiency

Article excerpt

INTRODUCTION

In today's marketplace, auditors face ever-increasing time pressure to ensure profitable audit engagements. Time pressure takes the form of deadlines and time budgets for specific audit areas (DeZoort & Lord, 1997; Bonner, 2008). This is especially true during economic downturns, which force audit firms to downsize personnel and reduce client engagement fees.

Oversight groups have long expressed concern that time pressure can cause auditors to engage in behaviors which compromise audit quality and ultimately lead to audit failure, and accounting research has noted that given the general acceptance of these behaviors, these concerns are justified (CAR, 1978; POB, 2000; Donnelly, Quinn, & O'Bryan, 2003). Dysfunctional audit behaviors include, but are not limited to, superficial review of client documents, failure to research an accounting principle, premature sign-off, and the underreporting of chargeable time (URT). URT occurs when the auditor does not report all the time spent working on a particular audit task.

Prior research has revealed that the vast majority of audit firms have formal policies forbidding URT, as URT leads to "unreliable time records and budgets, which are likely to lead to quality compromise in the long run" (Otley & Pierce, 1996, 79). Time budgets are used to plan and evaluate the performance of the audit team on each individual audit, and time budgets are normally created based on the number of hours recorded in the prior year's audit. When auditors engage in URT, time budgets are then artificially low for the next year's audit. Thus URT can lead to more severe behaviors in the future, such as premature signoff when auditors strive to meet artificially low budgets (Otley & Pierce, 1995).

Recent research has shown that audit managers, not audit partners, encourage entry-level auditors to engage in URT on engagements, creating "a subculture in public accounting that works counter to the interests of the firm. Such a subculture has the potential to leave engagement staff conflicted about appropriate conduct/behavior." (Agoglia, Hatfield, & Lambert, 2010, 19). This prior research highlights the fact that despite official firm policies prohibiting URT, it continues to be a recurring problem in today's audit environment.

The current study examines the effects of the conflicting messages between formal firm policies forbidding URT and implicit encouragement by audit managers to engage in URT on audit staff accuracy, efficiency, and actual URT. We theorize and find that these conflicting messages result in lower levels of accuracy, yet higher levels of efficiency. These results have important implications for audit practitioners.

Specifically, public accounting firms must carefully consider the overall effects of conflicting messages regarding URT, because while audit efficiency is increased, overall accuracy is decreased. The question remains as to how much auditing firms can sacrifice in terms of accuracy in the pursuit of increased efficiency and profit?

THEORY DEVELOPMENT AND HYPOTHESES

As mentioned above, auditors face ever-increasing time pressure to ensure profitable audit engagements, which takes the form of deadlines and time budgets for specific audit areas (Bonner, 2008). Prior research indicates that budget pressure is an accepted cultural aspect of auditing in public accounting firms (McDaniel, 1990; McNair, 1991; Otley & Pierce, 1996; Coram, Ng, & Woodliff, 2004; Bonner, 2008). Oversight groups have expressed concern that time pressure can cause auditors to engage in dysfunctional audit behaviors which compromise audit quality and possibly lead to audit failure (Rhode, 1978; POB, 2000). URT, which occurs when the auditor does not report all the time spent working on a particular task , is one such dysfunctional audit behavior.

Rhode (1978) was one of the earliest studies to identify URT as a dysfunctional audit behavior. …

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