Audit Partners’ Acceptance of Client-Preferred Accounting Methods: The Influence of Client Importance and Role Identity Salience.

• In Event: Client Effects in Auditing

Abstract

Audit partners protect capital markets by assuming a duty-focused stakeholder interest role of constraining aggressive, client-preferred financial reporting; yet to profitably operate as a business, audit partners must also undertake a sales-focused commercial role of acquiring or retaining profitable clients. In this study, I report the results of an experiment testing whether the salience of audit partners’ role identity (stakeholder interest versus commercial) and client importance (lower versus higher) interact to jointly influence judgments about client-preferred accounting methods. Drawing on research in psychology, I predict and find that seasoned audit partners are subject to an identity-related information processing bias when incentives related to client importance are lower, but the bias is eliminated as incentives related to client importance increase. Specifically, when fee/reputation incentives are lower, audit partners are more likely to accept client-preferred accounting methods when a commercial role identity is salient and less likely to accept client-preferred accounting methods when a stakeholder interest role identity is salient. As client importance increases, audit partners make judgments about the acceptability of client-preferred accounting methods consistent with motivations related to the theory of reputation protection. I find that as client importance increases, audit partners are less likely to accept client-preferred accounting methods, regardless of role identity salience. Supplemental analyses reveal that audit partners’ motivations related to reputation protection dominate motivations related to economic dependence as client importance increases. Counter to regulator and investor concerns, this study demonstrates that auditors, specifically audit partners, do not allow more aggressive, client-preferred accounting methods as client importance increases, but rather make more conservative client accounting judgments as incentives related to client importance increase.

Author

• Sean Hillison, Virginia Tech