Academic journal article Auditing: A Journal of Practice & Theory

An Examination of Auditors' Reporting Intentions When Another Auditor Is Offered Client Employment

Academic journal article Auditing: A Journal of Practice & Theory

An Examination of Auditors' Reporting Intentions When Another Auditor Is Offered Client Employment

Article excerpt

Recently, the Independence Standards Board (ISB) expressed concern over the independence issues that surface when audit professionals seek or are offered employment with clients. This is a common occurrence that may have a negative impact on independence in appearance and in fact. The only existing professional guidance on this issue is an AICPA ethics ruling that requires auditors who face this situation to remove themselves from the engagement until the employment situation is resolved. Since auditors who are considering an employment offer may be reluctant to reveal they are evaluating other career options to the audit firm, enforcement of the ruling may depend on other auditors who become aware of the situation to report the ethics violation to the appropriate party within the audit firm.

This study provides a case situation to audit seniors in which they learn that a manager has been offered a job with the client and has not complied with the ethics ruling by removing himself from the engagement. They are then asked whether they would report the matter to the engagement partner. The results showed that auditors were more likely to report the situation when they felt a personal responsibility to do so, and when they perceived that the personal costs of reporting were low.

The implications of these findings are that public accounting firms seeking to encourage the reporting of unethical behavior must first strengthen auditor perceptions of personal responsibility for reporting, perhaps by changing their work-related responsibilities. Second, upper management must clearly communicate and demonstrate that the personal costs for reporting the questionable behavior are low. For example, as part of training, firms can make explicit that employees have a responsibility to report the questionable behavior of other auditors. Firms might also consider offering rewards or bonuses for reporting as part of an approach to altering perceptions about the cost of reporting. Changing organizational values and employee perceptions may be a relatively slow process and represents a challenge for public accounting firms. However, the potential benefit from preventing and detecting questionable behavior may be significant.


Independence has been described as the foundation of the public accounting profession (Whittington and Pany 1995). This contention is reinforced by the recent establishment by the American Institute of Certified Public Accountants (AICPA) and the Securities and Exchange Commission (SEC) of an Independence Standards Board (ISB). In their 1998 annual report, the ISB highlighted two issues warranting standard-setting consideration. One of their concerns was the issues that surface when audit professionals are employed by their clients. They note that "these issues have been discussed by the SEC and the profession for years, as the frequency of partners and other senior professionals leaving their firms to join audit clients has increased" (Independence Standards Board 1998).

Over 20 years ago, the Commission on Auditors' Responsibilities (1978) recommended that public accounting firms be prohibited from helping their former employees find employment with clients. Since then, a number of research studies have examined independence concerns related to the auditor/client employment issue (Imhoff 1978; Firth 1981; Koh and Mahathevan 1993; Parlin and Bartlett 1994). In general, these studies demonstrate that concerns over client employment harming independence in fact or appearance are well founded.

In response to these concerns, the AICPA issued an ethics ruling restricting auditors' ability to accept or seek employment with a client during the audit engagement (AICPA 1991). The ruling indicates that "when the engagement is one requiring independence, the individual must remove himself or herself from the engagement until the offer is rejected or employment is no longer being sought, in order to prevent any appearance that integrity or objectivity has been impaired" (AICPA 1995, ET 191. …

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