Audit Firm Culture and Auditors’ Quality Threatening Behavior

• In Event: Auditor JDM II

Abstract

Auditors’ quality threatening behavior (AQTB) is dysfunctional workplace behavior that most directly threatens audit quality. An audit firm’s organizational culture in turn may importantly constrain, but also stimulate such dysfunctional behaviors. In this study, based on 3,443 survey respondents in 41 offices of six of the mid-tier and governmental audit firms and organizations in the Netherlands, we find that auditors are seen to engage in AQTB at least sometimes, including in those with a potentially more serious impact like premature sign-off. Next, we find that the office-level audit firm culture dimensions of error climate, quality threatening pressures, and time-budget and deadline pressure explain variations in AQTB (but quality commitment not). Importantly and thirdly, when we compare cultures between the audit and the non-audit disciplines (e.g., tax, consultancy) within the firms, our results not only indicate that the non-audit disciplines are lower (higher) on all (un)favorable culture constructs in our study - our results also show that quality threatening pressures in the non-audit disciplines exacerbates the detrimental effect of social pressure and weakens the positive effect of error climate on auditors’ dysfunctional behavior. Lastly, supplemental analyses based on additional archival data show (1) some indication that AQTB in turn relates negatively to audit outcome quality (measured by the auditor’s propensity to issue a going-concern audit opinion) and mediates the effect of audit firm culture on audit quality, and (2) that our results are not meaningfully affected by (endogenous) client-portfolio characteristics, audit office size, or local societal values the audit offices are embedded in. Our study shows that auditors operate in distinct audit firm cultures in their day-to-day practice explaining variations in auditors’ dysfunctional behaviors and audit quality. Furthermore, when audit firms strive to strengthen their culture, they should consider doing so throughout

Authors

• Olof Bik, Nyenrode Business Universiteit

• Tjibbe Bosman, University of Amsterdam

• Jan Bouwens, University of Amsterdam