Audit quality, auditor behaviour and the psychological contract Olivier Herrbach Universite´ des Sciences Sociales de Toulouse ABSTRACT The quality of the opinion provided by audit rms
Trang 1On: 29 July 2013, At: 20:30
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European Accounting Review
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Audit quality, auditor behaviour and the psychological contract
Olivier Herrbach Published online: 10 Nov 2010
To cite this article: Olivier Herrbach (2001) Audit quality, auditor
behaviour and the psychological contract, European Accounting Review, 10:4, 787-802, DOI: 10.1080/09638180127400
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Trang 3Audit quality, auditor behaviour and the psychological contract
Olivier Herrbach
Universite´ des Sciences Sociales de Toulouse
ABSTRACT
The quality of the opinion provided by audit rms is an important determinant of their long-term survival However, audit quality is dif cult to gauge, which makes it particularly sensitive to the behaviour of the individuals who carry on audit work Differences of interest between partners and other rm members can then have adverse consequences on the work motivation of eld auditors In particular, audit quality reduction behaviours are de ned as actions taken by an auditor during an engagement that reduce evidence-gathering effectiveness inappropriately These acts can threaten audit quality or damage the reputation of the profession This paper, which is based on
a survey of 170 audit seniors working in large audit rms in France, uses a model based
on ‘psychological contract’ assessment and affective commitment to account for audit quality reduction behaviours by the respondents The results show that the psycholo-gical contract elements dealing with the professional aspect of auditing are the most in uential, and that affective commitment is correlated to social but not to technical quality reduction behaviours The perception, by the respondents, of the quality of the review process is also signi cant Some implications of these results for the future of auditing are drawn
1 INTRODUCTION
At the social level, the recognition of audit quality by the economic environment
is necessary to the long-term survival of audit rms The future of the profession largely depends on its ability to assert and legitimize the value of audit methodologies and audit outcomes (Carpenter and Dirsmith, 1993) Quality is also a fundamental element of the competitive game between audit rms Research has evidenced the reputational impact of audit quality perceptions on the structure of the audit market (Moizer, 1997) However, audit quality is characterized by a strong ambiguity that makes it hardly demonstrable Unlike many other economic activities – where quality can involve precise and relatively objective criteria allowing to de ne and measure it – audit quality is problematical
Address for correspondence
LIRHE, Universite´ des Sciences Sociales, 31042 Toulouse Cedex, France E-mail: herrbach@univ-tlse1.fr
Copyright # 2001 European Accounting Association
ISSN 0963-8180 print=1468-4497 online DOI: 10.1080=09638180020017087 Published by Routledge Journals, Taylor & Francis Ltd on behalf of the EAA
Trang 4both intrinsically and for nancial statement users (Warming-Rasmussen and Jensen, 1998) It is also widely questioned within the debate on the expectations gap, which casts doubt on the profession’s ability to properly carry on its social
role (Sikka et al., 1998).
Audit quality has been investigated within a variety of perspectives in the literature: independence (Jeppesen, 1988), ethics (Moizer, 1995) or judgement (Libby and Luft, 1993) Little research, however, has been devoted to the organizational aspects of audit performance (Power, 1995) This is unfortunate since research on the audit team (Pentland, 1993) or audit managers (Humphrey and Moizer, 1990) has given valuable insight into the audit process Following Hopwood’s (1996) call for more research exploring the ‘black box’ of auditing, this paper addresses the impact of audit seniors’ behaviour on audit quality More speci cally, it focuses on quality reduction behaviours of audit seniors, i.e negligence behaviours that can challenge the quality of audit work or damage the image of the profession In characterizing the relationship between the individual auditor and the audit rm as a ‘psychological contract’, the paper aims to determine which elements of the psychological contract are relevant to audit team members’ performance The article is organized as follows First, auditing is described as a double agency relationship where audit quality rests in part on the performance of audit team members (Section 2) Then, quality reduction behaviours by audit seniors are de ned (Section 3) and the empirical research
on which the paper is based is outlined (Section 4) The results are presented in Section 5 and some implications for the future of auditing are drawn in Section 6
2 RESEARCH CONTEXT: AUDITING AS A DOUBLE
AGENCY RELATIONSHIP
As a monitoring process set up to lift the asymmetry of information between management and other parties, auditing plays a key role in the agency relation-ship around the corporation The introduction of an additional actor as controller cannot, however, completely solve the problems linked with such a relationship (Armstrong, 1991) Indeed, auditing can itself be characterized as a double agency relationship between nancial statement users and audit rms on the one hand, and the owners of the audit rms (partners) and their employees (auditors)
on the other hand In the rst agency relationship, nancial statement users (principals) rely on the opinion of the audit rm (agent) without having access to the accounting system of the company, nor to the audit work performed (see Figure 1) This situation gives rise to various problems linked with the economic,
competitive and legal constraints faced by audit rms (Sikka et al., 1998) In
essence, nancial statement users have to trust audit rms to carry on their work properly and report its outcomes honestly
The second agency relationship involved in auditing deals with the production
of audit work within the rms Audit rms are hierarchical organizations where each layer has a speci c role in the completion of the audit engagement The
Trang 5evidence-gathering work carried on by employee auditors is largely dissociated from the audit opinion, which is the responsibility of the partner In this situation, the audit partner (principal) builds his or her opinion on the basis of the audit les prepared by the audit team (agents) without attending the preparation of the les (see Figure 2)
This paper deals with the second agency relationship, arising from the asymmetry of information and status differences between partners and employee auditors In the largest audit rms, only a small number of auditors actually become partners Many employees stay only three or four years with their rm Although the opinion of the partner rests on the professional performance of the audit team, employee auditor and partner interests are thus divergent, which can create tensions between these categories.1 Research on audit rms in the
preceding decade (Dillard and Ferris, 1989) as well as more recently (Rebele et
al., 1996) has evidenced weak satisfaction levels of auditors at the lower ranks of
rm hierarchy Faced with a heavy workload under strict budgetary conditions, auditors can be tempted to engage in various quality reduction behaviours
Figure 1 Auditing as an agency relationship between nancial statement users and audit
rms
Figure 2 Auditing as an agency relationship between partner and audit team
Trang 63 QUALITY REDUCTION BEHAVIOURS OF AUDIT
SENIORS
At the technical level, an act of audit quality reduction can be de ned as poor execution of an audit procedure that reduces the level of evidence gathered for the audit, so that the collected evidence is unreliable, false or inadequate quantita-tively or qualitaquantita-tively This evidence no longer allows coverage of the risk linked
to the nancial statements Audit quality reduction behaviours have been presented in several published articles (McNair, 1991; Malone and Roberts, 1996; Otley and Pierce, 1996) and their description will be left out of the scope of this paper These behaviours are:
· reduction of work below what would normally be considered reasonable;
· super cial review of client documents;
· acceptance of weak client explanations;
· failure to research an accounting principle;
· failure to pursue a questionable item;
· false sign-off
These behaviours are linked to one aspect of audit quality: the proper execution
of audit work programmes By lowering the care and scepticism involved in auditing, they threaten the outcome of the engagement and the validity of the audit opinion However, beside this technical dimension of audit work, the existence and justi cation of auditing are largely dependent on the image generated by the profession (Carpenter and Dirsmith, 1993) Therefore, the preservation of a high level of apparent ‘professionalism’ is an important element
in the social image of auditing In that sense, apparent auditor behaviour is as important as work methods or technical competence, all the more so since behavioural aspects are more visible (Grey, 1998) (see Figure 3)
To enhance a study of employee auditors’ quality reduction behaviours, it is therefore relevant to consider behaviours that are not directly linked to audit work
in itself, but to the more social aspects of auditing This re ects auditors’ position not only as technicians, but also as individuals bound to present a fac¸ade of
Figure 3 The duality of audit quality
Trang 7professionalism both outside and inside the rm with respect to peers, subordi-nates and supervisors In this paper, which is part of a larger research centred on the audit team, only behaviours within the audit team are considered, i.e those involving day-to-day interactions between team members at the client’s premises
or over lunch Other approaches could be possible, especially those dealing with the sometimes complex relationships of eld auditors with members of the
audited company (Pasewark et al., 1995) or the hierarchy of the audit rm
(Dirsmith and Covaleski, 1985) However, these other aspects of professionalism were left out of this study
The rst series of behaviours taken into account in this study, which focuses on audit seniors’ role attributes, are:
· to supervise a team member inadequately, although supervision is an important element in seniors’ job;
· to ll out staff performance appraisals too rapidly, which limits the ef ciency
of the formalized evaluation system of the rms;
· to put the audit team under excessive pressure, which threatens team members’ motivation or satisfaction
These behaviours mainly affect the audit team, but indirectly involve the rm because of their possible impact on the attitudes and morale of team members Other behaviours directly affect the rm by running against professional values The non-professional behaviours studied in this research are the following:
· to talk about looking for another job in the presence of the audit team, which shows to others a lack of motivation for auditing and commitment to the rm;
· to gossip about the rm or its hierarchy, which can harm the cohesion of the
rm;
· to cast doubt on the rm’s methods in the presence of the audit team, which challenges the ef ciency or effectiveness of the rm;
· to cast doubt on the effectiveness of an audit, or of auditing in general, which challenges the social usefulness of auditing
4 RESEARCH MODEL
From an economics or legal perspective, the nature of the agency relationship between the auditor and his or her rm can be analysed as involving a ‘work contract’ From a social exchange theory perspective, however, the relationship between individual auditors and their rms can more largely be characterized as a
‘psychological contract’ in which an auditor exchanges adequate performance against various forms of compensation (Rousseau and Parks, 1993) The psychological contract is a description of the exchange relationship between the employee and the organization that has recently received much attention in the
organizational behaviour literature (cf the Special Issue of the Journal of Organizational Behaviorin 1998) It consists in the perception, by the employee,
Trang 8of the reciprocal obligations (promises) between himself or herself and the organization These ‘promises’ are different from mere ‘expectations’ because some reasons (for example, recruiter statements during a job interview) make the employee believe that they will be ful lled The contract is said to be ‘psycho-logical’ because its elements are not necessarily explicit and precise, but can take
an ambiguous, undetermined or implicit character The work contract and other formalized elements (manuals, internal rules, etc.) play a role in the psychological contract of the employee, but are only a part of it
The psychological contract involves periodic reassessments, by the employee,
of the exchange relationship with the employer (Shore and Tetrick, 1994) These assessments can lead to attitudinal and=or behavioural outcomes More speci -cally, this research studies the impact of psychological contract breach or ful lment as an explanatory factor of quality reduction behaviours by audit seniors Based on Robinson (1996) and a literature review on auditing, ten elements that could be the employer’s contribution in the psychological contract between auditors and their rms were identi ed:
· job security;
· a high salary;
· performance-based pay;
· interesting work;
· an international experience;
· career opportunities within the rm;
· career opportunities outside the rm;
· quality professional training;
· work autonomy;
· enjoyable human environment (two aspects: with colleagues and within the
rm in general)
This study seeks to establish a link between the assessment of each of these elements of the psychological contract and quality reduction behaviours by audit seniors As the evaluation of the psychological contract is an essentially cognitive process (Morrison and Robinson 1997), an affective construct was also included
as an independent variable: the affective dimension of organizational commitment (Allen and Meyer, 1990) This construct measures the level of affective attach-ment between individuals and their organizations Two contextual variables are also studied First, the perception of quality control in the rm (the assessment, by each auditor, of the ef ciency of the review process) is included since prior research has evidenced its impact on auditor behaviour (Malone and Roberts, 1996; Otley and Pierce, 1996) Second, the frequency of underreported time (time worked, but not charged by the auditor) is also included, as it has been shown to
be a pervasive element in audit rms that can be resented (McNair, 1991) The tested model is shown in Figure 4
This research is based on an anonymous questionnaire sent to French audit seniors.2 In France, employee auditors begin their careers as assistants for two
Trang 9years and are then promoted to senior for another two years At this stage only some of them are pursuing a professional quali cation – as this really becomes an issue only at the manager level – but all of them hold a university degree in some business-related eld The reason for the choice of this study population is twofold First, it is a pivotal rank in the hierarchical structure of audit rms Also, the socialization of individuals of this rank is suf ciently advanced (two to four years of experience) to have stabilized attitudes and behaviours, which authorizes
a static research model The questionnaire was launched in autumn 1998 It was sent to auditors working in the large international audit rms (Big Five) and two
of the largest French rms A total of 395 questionnaires were sent and 170 exploitable questionnaires were received (43%) This response rate is very high for a mail survey in France and ensures suf cient external validity of the results
In this research, psychological contract assessments were measured using a method based on Robinson (1996) which compares between the perceptions, by each respondent, of rm promises and their ful lment For each of the ten elements of the psychological contract, its evaluation is a variable that is negative when a contract breach occurs and positive otherwise The perception of the quality of the review process was measured by two items: ‘The review process in
my rm is effective in ensuring complete audit work’ and ‘The review process in
my rm is effective in ensuring honest audit work’ The frequency of the behaviours was measured by asking auditors how often they engage in each quality reduction behaviour (Very often, Often, Sometimes, Rarely, Never) This scale is the one used by other research on the subject (Otley and Pierce, 1996) Underreported time was measured in the same way The self-reported frequencies
of the behaviours (in per cent of answers) are shown in Tables 1 to 3
It appears that the most severe behaviour (false sign-off ) is the less frequent and a large proportion of auditors say they never commit it Other behaviours are more frequent Among them, failure to pursue a questionable item is the least
Figure 4 Research model
Trang 10common, which is reassuring as this is the basis of audit work In general, the frequencies observed in this study are a little larger than those measured in the USA (Malone and Roberts, 1996) and Ireland (Otley and Pierce, 1996) It is dif cult to conclude, however, that French auditors are more negligent than their American and Irish colleagues as cultural biases may have affected the answers or the understanding of the questions Only false sign-offs are more frequently admitted by American and Irish auditors Given the sensitivity of this question, this result also has to be taken with care
The proportion of respondents who neglect at least ‘Sometimes’ their duties linked with team management is quite high This result is in line with prior research that has highlighted the problems linked with the evaluation systems in audit rms (Hunt, 1995) and the lack of emphasis rms put on team management
Table 1 Audit quality reduction behaviours
Behaviour Very often Often Sometimes Rarely Never
Reduction of work below what is
considered reasonable 1 12 40 37 10 Super cial review of client document 2 14 39 37 8 Acceptance of weak client explanation 2 9 34 37 18 Failure to research an accounting
Failure to pursue a questionable item 1 6 18 42 33
Table 2 Team mismanagement
Behaviour Very often Often Sometimes Rarely Never
Supervise a team member inadequately 5 18 41 31 5 Fill out staff performance appraisals
Put the audit team under excessive
Table 3 Non-professional behaviours
Behaviour Very often Often Sometimes Rarely Never
Talk about looking for another job
in presence of the audit team 5 17 29 24 25 Gossip about the rm or its hierarchy 5 14 29 32 20 Cast doubt on the rm’s methods
in presence of the audit team 1 11 29 33 26 Cast doubt on the effectiveness of an
audit, or auditing in general 2 10 27 35 27