Perceived Adverse Consequences of Quality Threatening Behaviour in Audit Firms
Abstract
Research in many countries has consistently shown that audit seniors engage in widespread quality threatening behaviours (QTB). Regarding the consequences of these behaviours, only audit partners’ perceptions of possible consequences have been examined previously. The objective of this study is to examine audit seniors’ perceptions of the consequences of QTB for internal and external groups using semi-structured interviews with 25 audit seniors in Ireland. Findings suggest that detection of the behaviours is an important factor in determining the consequences for individual auditors, audit firms and the profession but not for the wider business community. In general, interviewees perceived low risk of detection and showed little consideration of the ethical implications of their actions. No communication was perceived to exist between the firms and audit seniors on prohibition of the behaviours or sanctions against those found guilty of engaging in the behaviours. Although the literature highlights the importance of personnel controls in complex environments such as audit firms, these findings suggest that the effectiveness of personnel controls is undermined by a perception that the likelihood of serious consequences is remote and also by weaknesses in the ethical training of auditors. The use of the term dysfunctional to describe QTB is open to question given the absence of a perceived link between the behaviours and consequences for organisational effectiveness found in this study.
SUMMARY
A long line of research studies over more than a quarter of a century has shown that audit trainees engage in behaviours such as biasing of sample selection which have the potential to threaten quality (e.g. Rhode, 1978; Pierce & Sweeney, 2003). Time budget pressure has been found to be significant in explaining the behaviours (Otley & Pierce, 1996). Due to the difficulty of measuring quality and limited effectiveness of behavioural controls in the field, audit firms place high reliance on the recruitment and training processes and the personal involvement of audit partners to prevent the behaviours from occurring (Pierce & Sweeney, 2005). The behaviours are assumed to impact negatively on organisational effectiveness and are considered dysfunctional for audit firms, though little research has been carried out examining the consequences of the behaviours. It might be expected that these behaviours would have adverse consequences for individual auditors, audit firms, the audit profession and the wider business community. Yet there is no evidence of any adverse consequences for any of these groups. Negative publicity currently surrounding audit firms has related to wider issues such as auditor independence (Lin et al., 2003). The only study which examined the consequences of the behaviours was from the audit partners’ perspective (Pierce & Sweeney, 2005). The purpose of this study is to examine audit seniors’ perceptions of adverse consequences for these groups as audit seniors are considered to be the most pressurised group and have been found to engage in widespread quality threatening behaviours (Otley & Pierce, 1996). Semi-structured interviews were carried out with 25 audit seniors from 4 of the Big Five firms in Ireland in 2000. Interviews were taped and a structured method was used to analyse the findings.
Results suggest that audit seniors perceive few consequences of the behaviours for themselves, their employers or the audit profession due to the perceived difficulty of detecting the behaviours and claims that the conscientiousness of audit seniors ensures that the behaviours do not occur in any area of significance. The perceived low magnitude of consequences appeared to influence auditors’ ethical reasoning with few audit seniors showing any concern for the ethical dimensions of these behaviours. Justifications such as time pressure, proximity of the weekend and lack of client concern with audit work were used by audit seniors to rationalise the behaviours. Audit seniors perceived that the firms’ management did not discuss the possibility of occurrence of these behaviours and audit seniors were uncertain as to how auditors found to have engaged in the behaviours would be treated. Termination of employment was perceived to be a probable consequence by some audit seniors but others considered that a reprimand from the firms was the most likely consequence. The findings suggest weaknesses in the ethical training that auditors receive and highlight the need for further research on the factors that influence both auditors’ identification of an ethical dilemma and their level of moral reasoning.
INTRODUCTION
The incidence of quality threatening behaviour (QTB) in audit firms has been the subject of research studies over a long period of time and in many countries including the United States (Rhode, 1978; Alderman & Deitrick, 1982; Kelley & Margheim, 1990; Malone & Roberts, 1996; Donnelly et al., 2003), United Kingdom (Willett & Page, 1996), Ireland (Otley & Pierce, 1996; Pierce & Sweeney, 2004), New Zealand (Cook & Kelley, 1991) and France (Herrbach, 2001). Findings have been broadly similar internationally with relatively high levels of auditor dysfunctional behaviours reported in all countries. Although the audit profession has been the subject of much public attention and scrutiny following highly publicised corporate collapses, it has been argued that much of this adverse publicity has related to wider issues such as auditor independence (Lin et al., 2003), rather than specific behaviours of the audit team. A considerable amount of research effort has focused on developing an understanding of the range of behaviours that constitute QTB and the factors that are associated with its occurrence. Motivation for engaging in such behaviour and the positive outcomes for those who do so, in terms of avoiding budget overruns and improving personal performance evaluations, has also been well documented. However, there has been little investigation of whether these behaviours are perceived to be linked with any significant consequences for the individuals who engage in them, their employers, or the wider profession. Difficulties in gaining access to audit firms for research on sensitive topics has been noted (Gendron, 2000) and is likely to be a contributory factor to the shortage of empirical findings in this highly sensitive area.
Studies designed to develop and test models to explain the occurrence of these behaviours have generally focused on audit firm control systems, within which time pressure has consistently been found to be a significant explanatory factor. A contingency theory framework has been adopted in much of this research, emphasising the difficulty of using tight controls such as time budgets in an environment where the output of the audit (audit quality) is not easily measurable (Otley & Pierce, 1996; Pierce & Sweeney, 2004). Although the association between specified aspects of the control system and audit team behaviours has been frequently examined, little consideration has been given to the impact of the behaviours on organisational effectiveness. The only prior published study that reported perceived consequences of the behaviours for the organisation was based on the perspective of audit partners, who were found to generally understate the frequency of the behaviours, particularly those which appeared to be potentially damaging behaviours such as premature sign-off (Pierce & Sweeney, 2005). The perceptions of the audit seniors who actually admitted to engaging in QTB have not been previously sought regarding possible adverse consequences of their behaviours. Accordingly, the purpose of this study is to investigate audit seniors’ perceptions of the adverse consequences of quality threatening behaviours for individual auditors, the audit firm, the profession and the wider business community.
The next section sets out the literature review, organised around relevant management control literature which forms the framework for the study. The application of this framework to audit firms and previous findings on control systems in audit firms are then discussed. The research objective and method are then detailed and this is followed by an analysis and discussion of the findings. The paper concludes with implications of the findings and areas for further research.
LITERATURE REVIEW
Management control theory
The contingency theory of control seeks to identify specific aspects of the control system which are associated with defined circumstances (contingent variables) and to demonstrate an appropriate matching in terms of organisational effectiveness (Otley, 1980) (see Figure 1).

The minimum necessary contingency framework for management control (adapted from Otley, 1980)
The first link (between the control system and contingent variables) has been examined frequently and an important finding is that traditional control systems based on output targets are considered unsuitable for complex organisations, and looser forms of control such as personnel and social controls may be more appropriate (Ouchi, 1979; Emmanuel et al., 1990). The second link (between the control system and organisational effectiveness) is not easily measured and various studies have concentrated on different functional and dysfunctional outcomes of the control process. Chenhall (2003) provided a summary of outcomes examined in previous studies which he divided into those relating to the use or usefulness of management accounting systems (MAS), behavioural, and organisational outcomes. Functional outcomes examined in previous studies include job satisfaction (Aranya, 1990), performance (Brownell & Dunk, 1991), and motivation (Kenis, 1979).
Functional outcomes are not always achieved and it has long been recognised that the way in which accounting information is used can also lead to dysfunctional behaviour, or outcomes that are not in the organisation’s best interest (Hopwood, 1972). Merchant (1984) used the term ‘gamesmanship’ to refer to actions taken by managers that are intended to improve their measured performance without producing any positive economic effects. Dysfunctional outcomes examined in contingency studies include budgetary slack (Onsi, 1973), data manipulation (Hopwood, 1972; Birnberg et al., 1983), discouragement of new ideas and short-term thinking (Merchant, 1990), and job-related tension (Brownell & Hirst, 1986). Certain behaviours which appear dysfunctional to outsiders may, however, be necessary for organisations to survive (Brunsson, 1993) and as a result may not impact adversely on organisational effectiveness. For this reason, it is important that the assumed negative relationship between apparently dysfunctional behaviours and organisational effectiveness is examined.
Management control in audit firms
The evolution of the corporate organisation in the early nineteenth century, where management and owners of a business are separate, resulted in a need for a corporate audit (Lee, 1993). In the agency theory framework, the audit can be considered a monitoring device to control relationships between principals (shareholders) and agents (directors). The agent increases confidence in its activities by showing that its activities are controlled and the audit represents a control or monitor over these activities. Auditors, however, are imperfect monitors and investors have to form expectations about the quality of the audit work based on the auditor’s reputation, as they are unable to observe the effectiveness of audit tests (DeAngelo, 1981). The obscurity of audit work also results in difficulties within the firm as audit partners are unable to observe the behaviour or quality of work of audit staff in the field making the audit environment a ‘control unfriendly’ one. The audit opinion is based on the audit work performed and this is detailed in the audit working papers which are subject to review. However, output controls such as the audit review are difficult to implement due to the absence of re-performance of audit work (Pierce & Sweeney, 2005) and minimal levels of audit file documentation (Barrett et al., 2005).1 Behavioural controls are of only limited effectiveness due to the absence of continuous supervision in the field (Sweeney & Pierce, 2004).
The difficulty of observing audit quality and consequently the difficulty of detecting sub-standard work suggests that high standards of integrity and moral reasoning are important characteristics for audit staff. There are two main streams of western ethical thought on moral evaluation: consequentialism and deontology (Moizer, 1995). The consequentialist, or teleological view (Brady, 1985) judges the ethicality of an action on the basis of its outcome or consequences (Beu et al., 2003). Jones (1991) defined magnitude of consequences as ‘the sum of the harms (or benefits) done to victims (or beneficiaries) of the moral act in question’ (p. 374). Empirical evidence supports a positive association between perceived magnitude of consequences and each of the first three stages of the ethical decision making process (identification of an ethical dilemma, ethical evaluation and intention to act) (Barnett & Valentine, 2004). The deontologist view suggests that certain actions are unethical regardless of the consequences (Beu et al., 2003). The ethical codes issued by the accounting profession ‘. . . tend to be phrased in a deontological way as a series of duties that are morally obligatory for members of the profession’ (Moizer, p. 422). However, problems arise in accounting that cannot easily be resolved by reference to ethical codes of conduct (Hull et al., 1999). Where there are no rules or existing rules are unclear, the quality of auditors’ professional judgement depends on their level of moral reasoning (Gibbins & Mason, 1988).
Previous empirical studies in the United States have shown that the level of moral reasoning of accountants is lower than that of other professional groups (Lampe & Finn, 1992; Armstrong, 1987). Clarke et al. (1996) found that the level of moral reasoning of Irish chartered accountants was slightly lower than the scores for accountants and other professionals of the same age and equivalent education in the United States. Treatment of auditing in professional examinations has been criticised for its technical emphasis and the fact that it is ‘. . . rarely viewed as an activity which has social, organisational, and behavioural dimensions and for this reason is dangerously myopic’ (Roslender, 1992, p. 185). Ethical guidelines are given little attention in professional examinations and time pressure has resulted in a professional education and training emphasis that is ‘. . . inconducive to the reflection and deep learning necessary for effective ethics instruction’ (Hull et al., 1999, p. ix). Similar issues have been identified in academic education and concerns have been expressed regarding the limited ethical education of accounting students at university level (Pierce & O’Gorman, 2004).
Prior empirical findings
Consistently high levels of QTBs by audit staff have been reported in prior research, including behaviours such as biasing sample selection, unauthorised reduction in sample size and premature sign-off (Rhode, 1978; Alderman & Dietrick, 1982; Otley & Pierce, 1996). Pierce & Sweeney (2003) listed 10 specific forms of QTB and asked audit juniors and seniors to indicate how frequently they engaged in each of the behaviours. They found that 43% of auditors said that they at least sometimes accepted weak client explanations and made superficial reviews of client documents. Lower frequencies were reported for other behaviours such as biasing of sample selection in favour of less troublesome items (36%), reliance on client work more than appropriate (31%), failure to research an accounting principle (29%), premature sign-off (24%) and reduction of work on an audit step below what was considered reasonable (21%). The link between the control system and these behaviours has been frequently examined in previous studies and time pressure has consistently been a significant variable (Pierce & Sweeney, 2004; Kelley & Margheim, 1990). The relationship between the frequency of QTB and a number of other variables such as leadership style (Kelley & Margheim, 1990), organisational commitment (Otley & Pierce, 1996), size of the firm (Margheim & Pany, 1986), personality variables (Malone & Roberts, 1996) and ability of firms to detect the behaviours (Margheim & Pany, 1986) have been examined in previous studies, though findings have been mixed.
In view of the obvious potential of these behaviours to undermine the reliability of fieldwork on which the final audit opinion is based, it would be expected that they could have considerable adverse consequences for the organisational effectiveness of audit firms in terms of reduced audit quality, damaged reputation and increased risk of litigation. From the perspective of the individual auditor, the behaviours represent the individual’s attempt to cope with pressures and dilemmas that are deemed undiscussable with a higher authority (McNair, 1991) and would therefore be expected to result in increased levels of stress and tension, and adversely affect job satisfaction and general morale.
The link, however, between the behaviours and organisational effectiveness has received little attention. The only study that has previously examined the adverse consequences of QTB did so from the partners’ perspective and reported that, in general, audit partners did not perceive that serious consequences would arise from these behaviours unless they occurred in a significant area (Pierce & Sweeney, 2005). The partners were also of the view that the behaviours were less likely to occur in critical areas, due to a higher level of control over more significant areas and the professionalism of the auditors which would deter them from engaging in the behaviours in an area where serious repercussions were likely. Partners also emphasised that, given the trend towards a reduction in audit work and a tailoring of audit programmes to individual clients, all audit work was important, thereby contradicting their view that reductions in the quality of work in certain areas would have few adverse consequences. Where the behaviours are detected, the partners identified a number of consequences for the individual auditor but there was no general agreement on whether the behaviours would result in the ultimate sanction of termination of employment. Whether the behaviours were perceived to be deliberate was considered significant in determining the consequences for the individual auditor, with many partners emphasising re-training and mentoring as outcomes of perceived inadvertent behaviour.
The forms of dysfunctional behaviours engaged in by auditors have a low risk of detection and as a result little research has been performed on formal prohibition of behaviour. The consequences of QTB are likely to vary depending on whether the behaviours are detected. In order for a firm to enact a policy on dysfunctional behaviour, that policy has to be implemented by individual auditors (Kaplan, 1995). Kaplan found that a significant minority (25 per cent) of audit seniors were either uncertain as to their reporting tendencies or not likely to report a detected incidence of premature sign-off (PSO) when the audit step was perceived by them as unnecessary. Kaplan suggested that one possible reason for an audit senior’s reluctance to report incidences of PSO may be a perception of the official penalty as overly harsh, particularly given the competitive pressures and mixed signals faced by auditors. Malone & Roberts (1996) found a strong inverse relationship between auditors’ perceptions of their firm’s ability to detect and punish those who commit QTB and the auditor’s incidence of QTB, though not all research supports these findings (Margheim & Pany, 1986). The effectiveness of the audit review in detecting QTB (Otley & Pierce, 1996) and firm culture acceptance of irregular shortcuts (Willett & Page, 1996) have also been linked to the behaviours.
RESEARCH OBJECTIVE AND METHOD
The study follows a long line of research showing high incidence of QTB in a wide variety of international settings and was motivated primarily by the absence of any previous findings regarding the adverse consequences of QTB as perceived by those audit personnel who engage in the behaviour. Previous research has been useful in describing a wide range of QTBs (Pierce & Sweeney, 2003) and in identifying specific aspects of audit firms’ control systems as primary factors associated with the incidence of the behaviours (McNair, 1991). While the behaviours have been described as dysfunctional for audit firms, the perceived link between the behaviours and organisational effectiveness has not been examined at audit senior level. The perceptions of the audit staff who actually engage in QTB of the adverse consequences of their behaviours are likely to be important for the audit profession, whose reputation could be severely damaged by such behaviour, and for audit firms, for whom audit staff perspectives could provide useful insights for the purpose of eliminating such behaviour. Accordingly, the purpose of the study is to investigate audit seniors’ perceptions of adverse consequences of QTB for individual auditors, the audit firm, the profession and the wider business community.
Semi-structured interviews were carried out with 25 audit seniors in four of the Big Five firms in 2000,2 as part of a wider programme of research on auditor behaviours in Ireland. Relevant extracts of the interview schedule are contained in the Appendix. The research was largely exploratory as it was not possible to identify detailed consequences from prior literature to inform the development of the interview schedule. A random sample of audit seniors was selected from listings provided by the firms’ human resource departments of all auditors in their third and fourth year of employment with the firms.3 The auditors were contacted directly and the firms were not made aware of the names of the individuals selected. The interviews were held in an off-site location away from the firms’ offices and assurances of confidentiality and anonymity were given.
While scholarly philosophers of science doubt that any one method can be truly objective, it is important to document all the steps taken to increase objectivity and to be constantly alert for subjectivity at data collection and analysis stages (Patton, 1990). The interviews were taped and immediately following the interviews, the tapes were transcribed using Microsoft Word. Transcripts of the first three interviews were reviewed by a colleague who was not involved in the research with particular emphasis on detecting any leading or biased questions. The interviews were all carried out by the second author who followed the wording specified in the interview schedule closely. Had there been any evidence of biased or leading questions in the transcripts, greater efforts would have been made to ask questions in a more neutral manner.
Data analysis was conducted using NUD-IST for organising and searching the data.4 As recommended by Patton (1990), an initial set of codes was developed before the interviews commenced and the codes were refined as the interviews progressed. However, these initial codes were descriptive rather than pattern codes (Miles & Huberman, 1994) as the research was exploratory. As suggested by Miles & Huberman (1994), following each interview, the interview was transcribed and the transcript coded before the next interview, thus ensuring as far as possible that the researchers focused attention on key themes and learned from the previous interview.
In analysing the data, the researchers had a full and thorough reading of each of the coded transcripts three times. Consideration was given to the appropriateness of the coding for each phrase and agreement was reached between the two researchers on the coding used. Identifying patterns in responses and moving from the descriptive codes to pattern codes was a key part of this process. For inductive research this involves searching for recurring phrases or common threads (Miles & Huberman, 1994). Adding evidence to confirm a pattern and being open to any evidence that disconfirms it, is important in forming conclusions as it helps to protect against presenting unreliable evidence (Miles, 1979). A report was then printed on NUD-IST of all the phrases relevant to each code and each of these phrases was again reviewed by both researchers to determine the appropriateness of the coding. For presentation of findings, phrases which appeared to represent a particular code/theme were used to present the ‘thick description’ (Denzin, 1994, p. 505) in the findings section. Patton suggested that ‘. . . sufficient description and quotations should be included to allow the reader to enter into the situation and thoughts of the people represented’ (pp. 429–30). Categorising interviewees along particular dimensions using pattern codes proved difficult given the exploratory nature of the research and the range of views presented by interviewees. Instead, the range of views are described in the ‘thick description’ with findings also presented in tabular form to allow the reader to ‘gain a sense of the flavour of the data as a whole’ (Silverman, 2000, p. 185).
Regarding the quality of the findings presented, the researchers checked to ensure there were no contradictory statements made by the same interviewee and that the evidence presented to back up each finding appeared to be reliable. Following the first draft of the ‘thick description’ prepared from the individual reports of each code, each of the transcripts was read fully again to ensure that each of the selected quotations was considered in context, resulting in further revisions being made to the presentation of findings.
FINDINGS
Each participating auditor was provided with a list of the most common forms of QTB reported in earlier studies (detailed above under ‘Prior empirical findings’) and requested to give their perceptions of the likely adverse consequences of QTB for individual auditors who engage in such behaviours, for audit firms, the accounting profession and the wider business community. The findings are reported below and a summary of major contributions made by each respondent is presented in Table 1. In order to comply with undertakings of anonymity, participating auditors are identified by numbers 1 to 25 and their firms by letters A to D.5
Audit seniors’ perceptions of consequences of QTB | |||
---|---|---|---|
For the individual auditor | For the audit firm | For the profession and business community | |
1 | Ability to get work finished, feeling of guilt, little risk of detection | Level of behaviour is so low that it is not a problem in firms | Adverse impact on reputation of profession if detected externally |
2 | Behaviour would be frowned on if detected, little risk of detection, have to live with personal embarrassment for having engaged in behaviour | Huge risk as firms are putting their staff under so much pressure that something is going to crack. Individuals will hold a gripe against audit firm when they leave due to the pressure they had to deal with | Adverse impact on reputation of profession if detected externally |
3 | If detected reduced opportunities for promotion and assignment to ‘safe’ jobs such as grant claims. Risk behaviour will be detected | If detected could impact on the client perception of the audit firm and damage to reputation of firm | Auditors will have to deal with time pressure when they leave the firm and engaging in these behaviours now could impact on how they respond to pressure in subsequent jobs |
4 | Detection is possible and if detected then a severe dressing down by the partner, monitored more closely and unassigned to audits a lot of the time | Could be serious if it was picked up by the client and result in damage to reputation of firm | Auditors will be willing to take short cuts in future employment |
5 | Increased ability to meet deadlines. If detected a serious slap on the wrists, no official reprimand but a quiet word would be had | Exposes the firm to a possible claim if detected externally | May affect how they deal with auditors in future when they are working for clients |
6 | Mental anguish, leave the firm when contract expires, if detected serious consequences but unlikely to be detected, no official sanctions for behaviour as not even considered that auditor would engage in QTB | Increased staff turnover only consequence if not detected. If detected it would affect the reputation of the firm | Willing to take short cuts on future jobs |
7 | No consequences if not detected but always risk of detection | Exposure to litigation if detected externally | Adverse impact on reputation of profession if detected externally |
8 | Serious ‘giving out to’ if detected but unlikely to be detected, no official discussion of sanctions | Puts the firm at risk | Willing to take short cuts on future jobs, public would lose confidence in the audit if they were aware of the behaviours |
9 | Avoidance of hassle from a manager over not meeting deadlines. If detected individual will be blacklisted | Irrelevant if nothing is missed but could be serious if an issue arises | The auditor’s reason for doing it will determine if they engage in the behaviour in future jobs |
10 | Manager would lose all trust in auditor if it was detected, not sure if auditor would be formally disciplined | Would only be consequences if company failed and generally the stuff that is left out is very minor | No consequences as little risk that behaviour would be detected outside the firm |
11 | No adverse consequences as unlikely to be detected. Ability to finish work by weekend | Remote possibility that it will end up in court | QTB could contribute to a major fraud not being detected which would impact on business world and reputation of profession |
12 | Ability to finish work early, auditors will have to live with themselves knowing that they have falsely signed-off a test | Could have implications for the firm if the area was problematic but unlikely that behaviours would occur in these areas, could be risk if auditors consistently engage in QTB | No consequences outside the firm |
13 | No consequences if not detected, auditor is not going to lose any sleep over it | No consequences unless it is detected and low risk of detection | Pressure will be higher in business so might lead to taking short cuts in future employment |
14 | Very bad habit to get into and possible some day it will be detected | Increased risk of litigation | Adverse impact on reputation of profession if detected externally |
15 | Ability to meet deadlines, if detected individual will get a bad name, might be ok if auditor only did it once but if it is consistent word will get around | Increased risk of litigation | Public may realise pressure auditors are under with competitive pressure on fees and pressure from the public for high quality work |
16 | If detected, reflected in auditor’s pay appraisal and future assignments | Would be reflected in the audit fee the following year if the client thinks a bad job has been done | Pressure to take short cuts will be even higher in future jobs as time pressure is constantly increasing |
17 | If not detected, then auditor will appear very efficient but if detected then reputation of auditor will suffer. Risk it will be detected. | Could lead to big problem if files are reviewed and shown that work not done | Internal audit may reduce amount of work in an area due to a false sense of security |
18 | No consequences if not detected but if detected loss of trust by manager | Increased risk of litigation | If it led to litigation, then public would question if the audit is really adding any value or if auditors are just signing-off on anything |
19 | Mental anguish over fear of getting caught. If detected may result in auditor not being able to get a job in the future due to word of mouth. No official sanctions in the firm | Could lead to litigation if detected externally but not a huge risk of detection | There is not widespread phantom ticking in the profession so no real consequences |
20 | Little risk of detection but if detected probably would result in termination of employment | Bad for reputation of the firm if detected externally | Could lead to external regulation of auditors if detected externally |
21 | Sackable offence if detected. Greater risk that behaviour at junior level would be detected as manager not in the field to supervise senior’s work | Increased risk of litigation if detected externally | Auditors will find it acceptable to behave unethically when they leave the firm |
22 | Feeling of guilt for having engaged in the behaviour, little risk of detection | Will hit the firms if errors in the accounts | Auditors willing to take short cuts in future jobs |
23 | Increased ability to meet deadlines. Will be detected if engaging in behaviour on a regular basis, will be assigned to crap jobs and more closely monitored | Litigation problems if anything goes sour | Adverse impact on reputation of the profession if detected externally |
24 | No impact for individual unless engaging in behaviour on every single job | Not sure how big the risk of litigation is for the firms but not good that behaviours occurred | Auditors willing to take short cuts in future jobs |
25 | Mental anguish, eventually will get caught if consistently engaging in behaviour, will impact on reputation of auditors and assignment to future audits | Most people are sensible enough to cut corners where they feel there is not a risk so probably no consequences for firm | Auditors make a judgement to reduce testing and that does not mean they will continue behaviour in future jobs |
Individual auditors
The consequences for the individual auditor who commits QTB were thought to vary depending on whether the behaviour was detected by superiors within the firm. Although there was a strong consensus that the consequences would be more serious if the behaviour was detected, there was no general agreement as to what negative consequences would result. No opportunities for career progression and assignment to safe, easy jobs such as grant claims or ‘crap jobs’ (23, Firm A) were referred to as probable consequences:
People not well favoured inside in the office have been weeks and weeks going through grant claims which everything has to be backed up on anyway… there is no fear of phantom bashing [term used by seniors to refer to audit work that has not been completed but appears completed] (3, Firm B).
Also referred to was a loss of trust by the manager, resulting in that manager avoiding working with the auditor in future. It was though that this loss of trust would be communicated informally between managers and the auditor would be ‘blacklisted’ (9, Firm B) and ‘that would be the end of your reputation’ (17, Firm D). Closer monitoring in future assignments and difficulty in obtaining future employment outside the firm were thought to be further consequences of a damaged reputation. One auditor was unsure whether a manager would inform the partner of the behaviour:
I don’t know if they [managers] would tell the partner as well but I would say they wouldn’t want you on their jobs anymore (10, Firm C).
A few auditors referred to possible termination of employment (‘I imagine you would be politely asked to leave’ (20, Firm A)) and the fact that ‘autoticking is a sackable offence’ (21, Firm B). Many other auditors, however, did not perceive serious consequences from detection. One interviewee gave an example of an auditor who ‘. . . ticked and bashed a bank rec[onciliation]’ (4, Firm A) without doing the work. This auditor was caught and the consequences were described as ‘a severe dressing down by the partner’ (4, Firm A). Other auditors referred to a possible ‘serious slap on the wrists’ (5, Firm B) and the fact that the behaviour ‘would be frowned on’ (2, Firm A). When questioned on the official firm sanctions and penalties, auditors maintained that there were no official sanctions within the firms where the behaviour is detected as ‘it’s not even considered that you don’t do your work’ (6, Firm B).
In general, it was considered that there was a low risk of detection of the behaviour by partners and managers and ‘it would be rarely found out’ (1, Firm A):
I presume if you are going to do it, you are going to do it in such a way that it is not going to be found out . . . there is no reason why it would be found out because there is a trust basis (2, Firm A).
Where the behaviour was not detected but there was a fear of detection, nine auditors referred to mental anguish as a negative consequence, though the perceived seriousness of this as a consequence varied:
But people, like phantom ticking or whatever, I know they generally feel – well should I do this or not or whatever but they are coming out to review or whatever tomorrow and they want to get rid of it. They feel guilty about it mainly due to something being found out (1, Firm A).
But I would say most people are conscientious, you can’t do it because at the end of the day if the file is reviewed you just can’t phantom tick. It is too risky (3, Firm B).
These auditors appeared to adopt a utilitarian perspective, being primarily concerned with the adverse outcomes that would arise for them if the behaviour was detected:
If they did think it would come back and haunt them they probably wouldn’t do it. I think it is probable you would think ‘how does it affect me, how would I get found out?’ (20, Firm A).
Where the behaviour remained undetected and there was no fear of detection (as appeared to be the case for 16 interviewees), it was generally felt that there are no visible negative consequences for the individual auditor:
As long as you get away with it there are no consequences. They [offending auditors] are hardly going to bat an eyelid or lose any sleep over it (13, Firm D).
When specifically questioned on the unethical nature of the behaviours, a minority of auditors referred to ‘feeling guilty’ (22, Firm D) based on moral considerations which arose ‘from a personal point of view, just living with yourself knowing you have signed off’ (12, Firm B). This inner feeling of remorse seemed to arise where the auditor had broken personal standards of integrity and also breached firm policy. One auditor referred to the ethical dilemma that arises in the context of personal embarrassment of having engaged in the behaviour, regardless of whether the behaviour was detected:
You would be very embarrassed, it’s not just a sort of – you got caught (2, Firm A).
Another auditor referred to the profession and suggested ‘the profession that we are in, there is a culture not to produce work that isn’t up to scratch (7, Firm C). Yet another auditor was adamant that auditors ‘are going to know it is wrong because you are told to do what is right so if you don’t do it, of course it is going to be wrong’ (6, Firm B). However, other than the comments by these five auditors, there was little evidence that the ethicality of the behaviours is given serious consideration by auditors and even for these auditors the unethical nature of the behaviours was only addressed when they were specifically questioned on it.
When questioned on ethics, many other auditors were aware of the questionable ethical dimension of QTB but used various factors to justify the behaviours. Time pressure on auditors and the fact that auditors do not engage in the behaviours ‘unless they have to’ (8, Firm C) were referred to by a number of interviewees. This was perceived to reduce the mental anguish associated with engaging in unethical behaviour: ‘You don’t fully think of ethics really if you have to meet a deadline’ (16, Firm D).
The proximity of the weekend and the reduced value of certain work in the context of improved technology were also used to justify certain behaviours:
I don’t think people really think about it. I suppose if you stopped at the time, you could probably say ‘oh yea, that is probably a bit unethical’, but I think at the end of the day, it’s usually a Thursday or a Friday, we’re getting out of here and you’re maybe not that bothered about finishing it up (11, Firm A).
I’d say everybody would admit alright that in an ideal world you should do it [audit work] to the fullest, but I suppose with the use of computers you’re only getting so much value out of bashing the thing to death . . . it wouldn’t be that you wouldn’t have the work done, it just wouldn’t be as good as it should be because of the time pressure (5, Firm B).
Another justification for the behaviour frequently provided was that the work was considered unnecessary by the auditor (‘it would be more the low risk stuff that you would be saying “well it has been alright in the past” and you know the process here is pretty good’ (5, Firm B)) and this was perceived to help resolve any ethical dilemma:
People might justify it and say you know it is not important and it is not material, you know it is not going to affect the audit or it is not going to affect sign-off (21, Firm B).
This was thought particularly to be the case with reductions in sample sizes on tests:
I would say there are cases where you select 20 and 15 are right . . . It wouldn’t be a case of select 20 and the first 10 are right and 5 are wrong. I would say most people would investigate further there in fairness . . . most people are conscientious (3, Firm B).
The general attitude of clients was also used to justify the auditors’ attitude to audit work and their decision to engage in QTB:
The attitude that you get from clients and you get from the meetings, you get everywhere . . . audit is a waste of time, inevitably a little of it feeds down to the audit staff and if it is such a waste of time why would I bother spending five hours on something I could spend one hour on? (25, Firm C).
The type of behaviour was also considered important in determining ethical attitudes and, specifically, premature sign-off was considered very different from the other behaviours in terms of its seriousness:
Signing off a work programme, I wouldn’t do it and it would probably be for ethical reasons that I wouldn’t but in terms of reducing sample and things . . . you would have an ethical stance in that you would have done 10 and you are happy with them and you are saying 10 or 20 is fine so I would say you are satisfied in your mind . . . that it is ok from an ethical point of view (10, Firm C).
Finally, a few auditors perceived no ethical implications arising from QTB and did not feel a need to question the ethicality of the behaviours:
I don’t really associate ethics with those things. I think [QTB] is more poor quality of work (15, Firm A).
Another auditor seemed confused about the influence of ethical principles on mental anguish and questioned whether it was in the sense of compliance with accounting standards that the interviewer was referring to the ethicality of QTB. This seems to suggest either no awareness of ethical issues or the use of a rule-based approach to ethics.
Overall, a wide range of potential adverse consequences of detected and undetected QTB for individual auditors was identified. In general, auditors perceived a low risk of detection of QTB and where undetected, mental anguish for a minority of interviewees arising from fear of detection or the auditor’s ethical stance was the only negative consequence with the majority of interviewees alleviating any mental anguish by justifying the behaviours as acceptable given specific circumstances such as time pressure or lack of importance of the audit work. Where detected, widely divergent views were expressed regarding likely consequences ranging from a slap on the wrist to termination of employment with no perceived official sanctions.
Audit firms
Regarding audit firms, the adverse consequences of QTB were considered to depend on the specific area of the audit in which the behaviour occurred and whether the behaviour was detected outside the firm. Where the behaviour was detected externally and the area was significant, damage to the firm’s reputation where ‘it would obviously be in the papers a lot’ (20, Firm A) and increased risk of litigation as ‘it obviously exposes them to a possible claim’ (5, Firm B) were the most frequently mentioned consequences. A further important repercussion was increased questioning of the value of the audit by the client:
If something hadn’t been picked up in the review and an issue had been made out of it, obviously it would make the firm look incompetent. It would cause the company to question what work we do at all (4, Firm A).
Detection of the behaviour externally where the area was perceived to be of lesser significance, such as detection by client staff of a test that could not have been completed in the previous year, was also referred to by interviewees:
Someone comes along the following year to re-perform the same test and like one way they describe the test they are doing is to show the previous year to the client staff, and the client staff might look at it and say ‘that wasn’t done’, and you might get some clients who come in and say ‘there are working papers there from last year and they make no sense’. Obviously then the guy from the year before will get nailed on it (3, Firm B).
This was also thought to have implications for the audit fee as the audit firm would be in a weak negotiating position if the quality of work is perceived by the client to be poor (‘If a bad job is seen to be done, it would be reflected in the fee the following year’ (16, Firm D)). The likelihood of the behaviour being detected externally or internally was thought to be low:
Unless you are going to manufacture a whole working paper and I say I did all this but if it is something like review this or do this you might just say “oh we did that” so it is not going to be picked up internally . . . I think it would only really matter in a crisis situation where you are in court and asked did you do this work, and then they produce evidence to show it couldn’t have been done. So I think the possibility of being found out is very, very remote (11, Firm A).
If the behaviour was not detected externally, longer-term implications for the firms due to ‘putting their staff under so much pressure that something is going to crack’ (2, Firm A) were identified. In addition, when auditors change their employment, it was thought that they may ‘hold a gripe against the firm’ (2, Firm A) due to the pressure they had to endure while working in the firm and it was also thought to result in increased auditor turnover as ‘people who aren’t bothered doing the work aren’t bothered being there’ (6, Firm B).
In general, it was thought that QTB would not ‘have any effects for the firm . . . [unless] . . . the area was problematic’ (12, Firm B) and if auditors knew this they would not engage in the behaviours in that area as ‘most people are sensible enough to cut corners where they feel there isn’t a risk’ (25, Firm C). This was typically expressed as follows:
The only consequences would be if the company failed . . . it is very unlikely that something as trivial as something wasn’t signed off would lead to business failure . . . unless it was some sort of forward contract . . . but then you probably would have examined that anyway. You wouldn’t just tick it as agreed, . . . generally the stuff that is left out is very minor (10, Firm C).
One auditor, however, did point to the risk that ‘if there are a few people in every firm or on every second or third job [who QTB], the probabilities are that somewhere out there something is going to be missed’ (12, Firm B). This auditor, however, acknowledged that ‘just because you have carefully designed tests, a lot of the time it is blind fortune that you do actually pick up an error’ (12, Firm B) and that following the audit programme does not mean that errors in the accounts will be detected.
Overall, a wide range of perceived adverse consequences of QTB for the audit firm were identified, the seriousness of which depended on whether the behaviour was detected and significant, detected and minor, or remained undetected. Given the perceived low risk of detection of the behaviours, staff badwill and increased turnover are seen as the most likely negative outcomes.
Accounting profession and the wider business community
Audit seniors found it more difficult to comment on broader adverse consequences of the behaviours in terms of their likely impact on the accounting profession and the wider business community. There was general agreement that public knowledge regarding the incidence of these behaviours could have a major negative impact on the public image of accountancy, particularly given the current climate of negative publicity in which auditors are operating:
If it is ever found out it will reduce the image of that firm significantly, in the same way that all those tribunals . . . create a sort of an image of accountancy and an image of each individual firm (2, Firm A).
If detected outside the firm, QTB was also expected to lead to a further questioning of the success of self-regulation of the profession. At a more fundamental level, it was felt that public knowledge of QTB could lead to questions concerning the value of external audit as ‘if it was being done all over the place then people would have no faith in the audit’ (8, Firm C). Many auditors, however, considered that the behaviours would have no consequences for the profession as they are unlikely to be detected externally.
For the wider business community, it was believed that QTB might result in a ‘. . . false sense of security’ (17, Firm D) for clients in situations where clients reduce the level of internal auditors’ work on the basis that the external auditors were doing more detailed tests than had actually been done. Also a number of auditors highlighted possible negative consequences of a broader nature when auditors who reduce quality subsequently leave the accounting firms. One auditor pointed to the risk that individuals who engage in these behaviours are unable to deal with pressure and ‘the working environment out there is probably more pressurised than the audit environment’ (3, Firm B). Implications for the wider business world of a gradual erosion of ethical standards (‘people get used to kind of behaving unethically and I guess they start to find that acceptable’ (21, Firm B)) were highlighted:
As your career progresses, you will be willing to take short-cuts if that’s how you started’ (4, Firm A).
Not all auditors agreed, however, that these auditors would reduce quality in future jobs outside of auditing:
But you know the guy who does this because they are [sic] lazy or they are just cutting corners, they are always going to cut corners. I guess people will cut corners when they get out on their own. Then I actually have come across people who are there and they take sick days and they just see the three years [training] as being a means to an end and it is just a case of get the exams and get out. These people are very bright they just feel that the firms are exploiting them and when they get another job they will work hard and there might be zero implications then. Their reasons for doing it are the key thing (9, Firm B).
It was also perceived that when these auditors become clients and have to deal with other auditors in the future it may impact on their level of co-operation with the auditors as ‘they are not going to think much of auditors if they are dealing with them. They will probably assume all auditors do that [QTB]’ (6, Firm B).
Say they are the financial controller, they will just say this is enough for them [auditors] and they can be happy with it and if they are not, let them go off because they feel they know the story (5, Firm B).
Overall, audit seniors perceived that these behaviours could have negative consequences for the profession such as an adverse impact on the reputation of the profession, a questioning of the value of the audit and a threat to the continuation of self-regulation if the behaviours were detected externally. Negative consequences for the business world such as a false sense of security for clients, inability of auditors to deal functionally with pressures in future employment and lack of co-operation with auditors should these auditors become clients in the future were highlighted, regardless of whether the behaviour was detected.
DISCUSSION
In considering the findings it is important to bear in mind the strengths and limitations of the study. Strengths include access to a broad sample of practising auditors and the use of face-to-face interviews as opposed to anonymous surveys used in previous studies of related topics, tape recording of interviews followed by immediate transcription, and the use of a structured method to analyse findings. A limitation is that seniors may not be aware of many adverse consequences of the behaviours, particularly for groups outside the firm. At the same time, their perceptions are important as they are qualified or almost qualified accountants and they perform most of the work in the field. Audit seniors are also the group that has been shown in prior research to engage in widespread QTB and there is evidence that their assessment of likely consequences is an important consideration in their decision to engage in the behaviours (Malone & Roberts, 1996). A further limitation is the absence of anonymity which may have resulted in social desirability bias in responses. Interviewees were, however, assured of the confidentiality of the findings and of the fact that their firm was not aware of which audit seniors had been selected for interview. Interviewees’ responses were in many cases contrary to what might be deemed socially desirable, suggesting that social desirability bias was not a major factor.
Even though it would be expected that partners and seniors may have very different perspectives on the behaviours, reflecting their different positions in the organisation, seniors’ perceptions of the adverse consequences of the behaviours for the individual auditor and audit firm were very similar to those of audit partners which were reported in earlier research (Pierce & Sweeney, 2005), and these similarities are highlighted below. Three main issues arise from the findings, each of which is discussed in the following sections. These are the impact of the behaviours on organisational effectiveness, limitations of personnel controls and deterrence of behaviours.
Organisational effectiveness
It was expected that these behaviours would be perceived to have a number of consequences for individual auditors, audit firms, the profession and the business world which would suggest a reduction in perceived organisational effectiveness. However, the importance of whether the behaviours were detected was a prominent feature of the findings and where the behaviours did not come to light, few consequences were perceived. This link between detection and consequences was consistently emphasised by interviewees as a major issue in response to an open question on consequences and though it may appear obvious, it is has not been identified previously in the literature. It may also have important policy implications for audit firms.
If undetected, a minority of auditors referred to mental anguish arising from fear of detection or the auditor’s ethical stance as the main adverse consequence for the individual auditor. The perceived low risk of detection and justifications provided by auditors such as time pressure, lack of importance of the work and proximity of the weekend reduced the level of this anguish and for the majority of auditors mental anguish did not feature as a consequence. If the behaviours were detected by the firm, the perceived severity of the consequences varied from possible termination of employment, poor job assignments and no career progression, to a ‘slap on the wrists’ or a ‘severe dressing down’ by the audit partner. These findings are consistent with the views of audit partners in Pierce & Sweeney’s (2005) study where partners did not identify any individual consequences of QTB where the behaviours were not detected. Also, partners in that study were not in agreement as to whether termination of employment would result where the behaviours were detected, and referred to poor job assignments, lack of career progression and a ‘ticking off’ as likely consequences. Findings in this study suggest that seniors are aware of the absence of any partner consensus regarding sanctions against auditors found guilty of wrong-doing (discussed in subsequent section). One senior mentioned that where the behaviour was detected by a manager, it was not considered automatic that the manager would inform the partner of the behaviour, suggesting that partners and managers are seen as very different groups. Given the high staff turnover in audit firms, neither lack of career progression nor a ‘severe dressing down’ may have any serious consequences for many auditors and in these circumstances, fear of detection is unlikely to constitute a major deterrent.
Regarding the perceived adverse consequences of QTB for the audit firm, where the behaviours were not detected outside the firm, the only negative consequences perceived were higher staff turnover due to low morale and perceived pressure to engage in these behaviours, the possibility of longer-term implications due to an increased level of substandard work, and employees holding a gripe against the firms after they leave. If these behaviours were detected externally, however, it was perceived that they could result in a loss of firm reputation, a risk of litigation and reduction in audit fees. Risk of external detection was considered ‘very, very remote’ and the behaviours were not generally regarded as being harmful to the firms. Auditors referred to doing it in a way that it would not be found out and only engaging in the behaviour in the low risk areas. This is consistent with audit partners’ perceptions reported in Pierce & Sweeney’s (2005) study, where many partners considered that it was very unlikely that auditors would engage in the behaviour in an area that would have serious consequences for the firm. However, where the work was deemed unnecessary by the audit senior, approval was not sought from a manager or partner for the reduction in audit work. Audit seniors are relatively inexperienced auditors and may not have the necessary experience or sufficiently broad perspective to accurately assess audit risk. If they believe that their judgement is based on sound principles and that the work is really unnecessary it would be logical for them to seek approval for the decision from their superior. Seeking approval would allow them to demonstrate their ability to assess risks and increase efficiency in eliminating unnecessary audit work in low risk areas and should be a desirable characteristic in an audit senior which would lead to improved performance evaluations. Seeking approval does not occur in relation to the behaviours examined in this study and auditors feel a need to conceal the judgements they have made.
For the accounting profession, again perceived adverse consequences were considered to depend on detection of the behaviour externally, with an adverse impact on the image of accountancy and decreased likelihood of the continuation of self-regulation resulting where the behaviours were detected. The perceived low risk of detection reduced the likelihood of these consequences arising. For the business world, failure to detect and address weaknesses in clients’ internal control systems due to a false sense of security by clients, reduced client co-operation with auditors, and the continuation of QTBs throughout an individual’s career were mentioned as possible consequences and these were not thought to be dependent on whether the behaviours were detected. The continuation of QTB throughout an individual’s career was thought to be dependent on the individual’s reasons for engaging in QTB and was not seen as a consequence for most auditors.
Overall, the risk of detection of the behaviours either internally or externally is perceived to be low. This is consistent with the absence of any official sanctions against those found guilty of wrong-doing and also with the absence of any adverse publicity concerning these behaviours. The perceived low risk of detection leads to a questioning of the assumed link between the behaviours which have previously been described as dysfunctional and organisational effectiveness as the behaviours appear not to have any serious implications for organisational effectiveness in terms of litigation or damage to the reputation of the firms. However, even without detection the behaviours are likely to impact on organisational effectiveness due to increased turnover and reduced morale of the workforce. Given, however, the number of factors which would impact on morale and staff turnover such as the general economic climate, the firms are unlikely to be aware of these consequences and a direct link between the behaviours and these variables is unlikely to be evident.
Personnel controls
Management of staff is key for the success and profitability of audit firms (Brierley & Gwilliam, 2001), and in complex organisations where outputs are difficult to measure, personnel and social controls assume greater importance (Ouchi, 1979). Personnel controls include both the selection process and training. Recruiting employees of high moral integrity and providing them with appropriate training is crucial for audit firms. Given the high levels of QTB reported in previous studies, these controls do not appear to be operating effectively. Despite this, there is evidence that audit partners take comfort from their perception that personnel controls are effective and that auditors’ sense of professionalism helps ensure that these behaviours would not occur in a significant area. This was supported by findings in this study where interviewees referred to being ‘sensible enough not to cut corners where they feel there isn’t a risk’. The appropriateness of obtaining comfort from personnel controls, however, is questionable given these findings which suggest that many auditors have a low level of concern with the ethical implications of their actions. While QTBs are clearly contrary to the spirit of the ethical guidelines of the professional accounting bodies, they are not specifically referred to in these guidelines.
Where dilemmas are not covered by guidelines, an auditor’s ability to identify an ethical issue is particularly important (Ponemon, 1993). Perceived magnitude of consequences has been found to influence this ability (Karcher, 1996; Shaub & Lawrence, 1996) and therefore these findings indicating few perceived consequences would suggest that auditors are less likely to identify an ethical issue. Even where they identify an ethical dilemma, their approach to resolving the issue will determine how they behave. Audit firms should be conscious that if auditors adopt a consequentialist approach (Brady, 1985) to resolving ethical dilemmas, they are unlikely to refrain from engaging in the behaviours for ethical reasons due to few perceived adverse consequences. A deontological evaluation process (Brady, 1985) needs to be encouraged within the firms and in professional examinations where auditors would have a deeper understanding of what behaviours would be considered contrary to the spirit of the ethical guidelines. How conducive the ethical environment created by the firms is to developing this deeper understanding is open to question given that the audit firms are responsible for placing audit seniors in situations where many feel they have no option but to resort to QTB to cope with the pressures in the environment.
Professional examinations have been found to be lacking in terms of ethical content (Roslender, 1992; Hull et al., 1999) and a low level of moral reasoning of Irish chartered accountants has been found in previous research (Clarke et al., 1996). Findings in this study provide further confirmation that insufficient attention has been devoted to the deontological approach to moral reasoning. Academic results appear to receive a high weighting in the selection process (Roslender, 1992) and Pierce & O’Gorman (2004) found that there is a need for increased coverage of ethics at third level education in Ireland. Therefore, students who obtain high academic results may not have developed strong moral reasoning capabilities. Educators and audit firms both have a role to play in developing ethical awareness and reasoning abilities of audit trainees.
Deterrence of behaviours
Audit seniors were not aware of any official policy on QTB or any communication from partners on the issue. Audit partners in Pierce & Sweeney’s (2005) study also presented consistent views on the absence of a firm policy. Interviewees in this study mentioned that it ‘is not even considered that you don’t do your work’. Again, this is consistent with findings from Pierce & Sweeney (2005), where partners considered it entirely inappropriate to communicate disapproval of taking short cuts in audit work. Audit seniors are aware of the difficulties involved in measuring the quality of their work and are in a position to exploit these difficulties, given the perceived absence of adverse consequences. It is likely that in deciding to engage in QTB, auditors weigh up the consequences of alternative courses of action such as performing all the audit work and exceeding time allocation and that the absence of any immediate consequences arising from QTB increases the appeal of this course of action.
Firms may not have drafted a policy on QTB due to the difficulty of detection and the apparent lack of need for such a policy. However, it is likely that the absence of a policy by the firms on sanctions against those found guilty of wrong-doing and the perceived vagueness of the treatment of offenders further allow some audit seniors to justify the behaviours as having a degree of acceptability given their working environment, particularly those who adopt a rule-based approach to ethical reasoning. It is also likely that the absence of such a policy reduces the fear of detection for many auditors due to uncertainty whether any serious consequences would really result where the behaviours are detected. Previous research reported evidence of an association between perceived firm culture regarding acceptance of irregular short cuts and the incidence of behaviours similar to QTB (Willett & Page, 1996). Clear communication by the firms of the unacceptability of the behaviours and the formation of an official policy on how offenders will be treated would therefore be expected to act as an effective deterrent.
Though conflicting findings have been reported in previous quantitative studies on the relationship between a firm’s ability to detect behaviours and the levels of the behaviours (Malone & Roberts, 1996; Margheim & Pany, 1986), in view of the perceived importance of detection in determining the adverse consequences of the behaviours found in this study, a major deterrent is likely to be an increased ability of the firms to detect the behaviours. Interviewees expressed a range of levels of fear of detection from ‘it is too risky’ to ‘they are hardly going to bat an eyelid or lose any sleep over it’ and also identified the consequences that would result from detection with various levels of certainty from ‘I don’t know if they [managers] would tell the partners’ to ‘that would be the end of your reputation’. It is possible that these variables (fear of detection and level of certainty over consequences) may explain the conflicting results found in prior quantitative studies on the importance of the firm’s ability to detect the behaviours. Increased ability to detect the behaviours may not deter auditors who have a low fear of detection due to the perceived remote possibility of serious consequences.
The difficulty of detecting the behaviours is reflected in the perceived absence of any formal sanctions against auditors found to have engaged in the behaviours. Given the difficulty of measuring the quality of the audit team’s work (Otley & Pierce, 1996), the absence of continuous supervision in the field (Sweeney & Pierce, 2004) and re-performance of audit work (Pierce & Sweeney, 2005), the use of traditional diagnostic controls can, at best, have only limited effectiveness in detecting undesirable behaviours. Barrett et al. (2005) suggested that relationships based on trust will assume greater importance given the changes in the audit environment which increase the difficulty of using traditional controls. If, however, employees adopt a consequentialist view of ethics and base decisions on magnitude of consequences, controls based on trust may be undermined due to the difficulty of detecting the behaviours and the absence of consequences. Partners have been found to use clan controls such as intuition to determine when monitoring versus trust is the most appropriate form of control (Pierce & Sweeney, 2005). Given the difficulty of detecting these behaviours, clan controls are likely to be crucially important in selecting individuals that may need additional monitoring to reduce the likelihood they engage in QTB.
FUTURE RESEARCH AND CONCLUSION
Findings in this study serve to identify a number of fruitful areas for further research. As the study was exploratory and the first to examine perceived consequences of the specified behaviours, it was not the intention to build a comprehensive model of the variables impacting on perceived consequences. A number of important factors were identified by interviewees, such as the likelihood of internal or external detection, fear of detection and level of certainty regarding consequences, and the study provides a basis for a deeper examination of these variables in future research. These factors may also prove fruitful in helping to explain the prior conflicting findings regarding a possible relationship between the firms’ ability to detect behaviours and the levels of the behaviours.
The findings provide evidence of only limited awareness of the ethical aspect of the decision to engage in QTB and suggest that a comprehensive study on auditors’ ethical reasoning in this area, and their attitudes to the various forms of QTB, is needed. Previous studies have assumed that dysfunctional behaviours such as premature sign-off are considered unethical (Shapeero et al., 2003), without any supporting research evidence. Future research could examine the variables that are associated with auditors’ identification of these behaviours as unethical and the factors that influence their decision to engage in the behaviours. Findings in this study suggest that perceived magnitude of consequences is one such factor.
One of the consequences of QTB for the business world was perceived to be a change in the attitude of offending auditors when they subsequently change employment and become clients. Interviewees also presented lack of client concern for audit work as a justification for their behaviour. The attitude of clients to auditors, the degree of importance that clients attach to the level of audit work carried out by the audit team, and clients’ awareness of the possibility of QTB by the audit team have not previously been examined. The impact of specific factors on the auditor–client relationship, such as previous employment of client staff with the audit firm, is also likely to be a fruitful area for future research. Behn et al. (1997) found evidence of a relationship between a client’s previous work experience with the current audit firm and client satisfaction. The degree to which client staff understand how audit teams operate has the potential to impact on a number of aspects of the auditor–client relationship.
The approach taken in this study was to examine perceived consequences for the group of behaviours termed QTB. The findings suggest that some specific behaviours such as a reduction in sample size were considered less unethical than others, such as premature sign-off. Differences are also likely between the behaviours in terms of difficulty of detection and perceived acceptability within the firms. An important area for further research is therefore to examine the behaviours separately and investigate differences in perceived consequences and related issues for each of the behaviours.
Lastly, empirical findings reported from this and earlier studies show that the controls used by audit firms to ensure high quality audit work all suffer from limitations. Re-performance of audit work, one of the few controls which would enable detection of QTB, does not appear to take place in the firms (Pierce & Sweeney, 2005). Future research is needed to examine the apparent contradiction between the firms’ espoused commitment to audit quality and the apparent absence of measures that deal directly with prevention and detection of QTB and that provide explicit sanctions against those found guilty of such behaviour. Recent changes in the audit environment arising from the implementation of the Sarbanes-Oxley Act 2002, which increase pressure on audit firms to maintain greater audit file documentation may have impacted on the firms’ ability to detect the behaviours and underline the importance of continued research as the audit environment changes.
NOTES
Appendices
APPENDIX
Extract from Interview Schedule
- 1
What are the adverse consequences of quality threatening behaviour for the individual auditor?
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Potential probes: Are there official firm sanctions and penalties? Are auditors reprimanded? What is the likelihood that the behaviours are detected by the firm? Any effect on job turnover? Career progression?
- 2
Does the unethical nature of the behaviour impact on the consequences for the individual auditor?
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Potential probes: Any impact on morale or motivation?
- 3
What are the adverse consequences of quality threatening behaviours for the firm?
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Potential probes: Reputation? Clients? Confidence in audit work?
- 4
This may be difficult to answer but I would like to get your views on it. Are there adverse consequences of quality threatening behaviours for the profession and the business world?
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Potential probes: While auditors are engaging in behaviours? After auditors leave the firm?
AUTHOR PROFILES
Bernard Pierce is Professor of Accounting and Executive Dean at DCU Business School, Dublin City University. His research interests include management accounting practice, management control, and the roles of management accountants. His research has been published in journals that include: Accounting, Organisations and Society, Auditing: A Journal of Practice & Theory, The European Accounting Review, Management Accounting Research, Accounting, Auditing and Accountability Journal and The British Accounting Review.
Breda Sweeney is a lecturer in the Department of Accountancy and Finance at the National University of Ireland, Galway. Her research interests include management control, ethics and audit quality. Her publications have appeared in academic accounting journals including The European Accounting Review, Management Accounting Research and Accounting, Auditing and Accountability Journal.