“Does dysfunctional auditor behaviour due to time budget pressure differ among countries?”
Hifsa Younus, 10371435
Bachelor of Science in Accountancy & Control University of Amsterdam
Ms H. (Helena) Kloosterman MSc 28 June 2015
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Statement of Originality
This document is written by Hifsa Younus who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and
its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
3 | P a g e Abstract
Audit time budget pressure occurs when an audit firm allocates a scarce number of audit hours to be used by auditors to complete specified audit procedures, this might increase the amount of dysfunctional auditor behaviour. However, there is not much literature available on effects of budget pressure in different countries. In this thesis, several countries all over the world will be researched on the frequency of dysfunctional auditor behaviour and what the possible reason could be that research shows different results. This thesis will be a literature review on this subject. The research question of this thesis is: “Does dysfunctional auditor behaviour due to time budget pressure differ among countries?”. Dysfunctional auditor behaviour will be measured by two criteria in this thesis; underreporting of chargeable time actually spent on an audit procedure and prematurely signing-off on the audit. The conclusion of this thesis is that dysfunctional auditor behaviour due to budget pressure is different across countries that are tested in this thesis. Differences are due to the various socio-economic backgrounds. The testing of additional countries might reveal even more variances. Therefore, more research on this topic is needed.
Samenvatting
Tijdsdruk in budgetten ontstaat wanneer een accountantskantoor een schaars aantal controle-uren toekent aan accountants om specifieke controlewerkzaamheden te voltooien. Dit kan de hoeveelheid disfunctioneel gedrag van de accountants verhogen. Echter, er is niet veel literatuur beschikbaar over de consequenties van budgetdruk voor auditors in verschillende landen. In deze scriptie zullen verschillende landen over de hele wereld worden onderzocht op de frequentie van disfunctioneel gedrag en wat de mogelijke reden zou kunnen zijn als het onderzoek verschillende resultaten toont. Deze scriptie zal een literatuurstudie over dit onderwerp zijn. De onderzoeksvraag van deze scriptie is: "Varieert de frequentie van disfunctioneel gedrag van auditors, ontstaan door tijdsdruk in budgetten, in verschillende landen?". Disfunctioneel auditorgedrag zal worden gemeten aan de hand van twee criteria in deze scriptie; onderrapportage van belastbare tijd daadwerkelijk besteed aan een
auditprocedure en voortijdig stoppen met de audit. De conclusie van deze scriptie is dat de frequentie van disfunctioneel gedrag verschilt tussen de landen die worden getest in deze scriptie. De redenen hiervoor waren de verschillen in de sociaaleconomische omgeving van de landen. Het testen van andere landen zou nog meer varianties kunnen onthullen. Daarom is er meer onderzoek over dit onderwerp nodig.
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Table of contents
1. Introduction ... 5
2. Background ... 6
2.1 What are budgets and how are they decided upon? ... 6
2.2 Worldwide dissimilarities ... 7
2.3 Dysfunctional auditor behaviour ... 8
2.3.1 Underreporting of chargeable time ... 8
2.3.2 Premature sign-off ... 9
3. Literature review ... 11
3.1 Underreporting of chargeable time ... 11
3.1.1 US ... 11 3.1.2 Ireland ... 12 3.1.3 Mauritius ... 13 3.1.4 Malaysia ... 15 3.2 Premature sign-off ... 19 3.2.1 US ... 19 3.2.2 Malaysia ... 19 3.2.3 Australia ... 20 3.2.4 Mauritius ... 21 3.2.5 Uganda ... 21 4. Discussion ... 27 4.1 General summary ... 27 4.2 Auditor judgement ... 28 4.3 Potential solutions ... 29 5. Conclusion ... 32 6. References ... 33 List of tables Table 1: Underreporting of chargeable time ... 16
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1. Introduction
The term “budget” evokes strong reactions from many auditors. Almost every audit firm in the world uses budgets as a performance measure. However, it has been shown by many researchers that budgets cause auditors to engage in what is called dysfunctional auditor behaviour due to the pressure they receive.
In general, audit time budget pressure occurs when an audit firm allocates a scarce number of audit hours to be used by auditors to complete specified audit procedures. Examples of dysfunctional auditor behaviour include prematurely signing-off on audit procedures and underreporting the amount of chargeable time that the auditor actually spent on finishing the audit to keep audit costs low.
Auditors are pressured to not exceed their budgeted time. It has previously been suggested (Fleming, 1980) that auditors’ budgets may be excessively influenced by client pressure to keep fees as low as possible, and that budget preparation should be tied in more closely to the estimated time to complete the audit programme. It has also been shown
(Fleming, 1980; Kermis & Mahapatra, 1985) that the previous year’s actual figures can have a strong influence on audit budgets (Otley & Pierce, 1996). However, there is not much
literature available on effects of budget pressure in different countries. In this thesis several countries all over the world will be researched on the frequency of dysfunctional auditor behaviour and what the possible reason could be that research shows different results. This thesis is thus of utmost importance since audit firms are multinationals with offices spread all over the world. Budgets may affect performance positively in one country, but not in the other. This thesis will be a literature review on this subject.
Therefore, the research question of this thesis is: “Does dysfunctional auditor behaviour due to time budget pressure differ among countries?”. Dysfunctional auditor behaviour will be measured by two criteria in this thesis; underreporting of chargeable time actually spent on an audit procedure and prematurely signing-off on the audit.
This thesis will start by giving some background on the topic of budgets, budget pressure, dysfunctional auditor behaviour and differences in countries concerning budget pressure. The second part will be the literature review. In this paragraph, research from different countries will be discussed and compared per criterium. The fourth paragraph is the discussion, in which the findings will be discussed and potential solutions will be given. The fifth and final paragraph will be the conclusion.
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2. Background
In this section the necessary background information will be given and the criteria that are used to determine dysfunctional auditor behaviour will be explained.
2.1 What are budgets and how are they decided upon?
Management control has traditionally been described as a mean that facilitates the process by which resources are acquired and consumed in achieving organizational objectives (Anthony, 1965). Budgets are a form of management control device, and are defined as being financial plans which aid in directing and evaluating the performance of individuals and subunits within organizations for better control and coordination of their activities (Bruns & Waterhouse, 1975). Consistent with this definition, budgeting research has traditionally focused on the effects of budgetary systems on budgetees (Covaleski & Dirsmith, 1983).
An audit budget allocates a portion of the firm’s (short-term) fixed pool of workers to a specific project. If the allocation is done properly, the projects are neither understaffed nor overstaffed. In this case scarce resources are utilized efficiently and effectively. Achieving time budgets and meeting time targets is important to career advancement in the industry (Kelley & Seiler, 1982; Sweeney & Pierce, 2004), although researchers and regulators question if it is truly appropriate or not (Bedard & Ettredge, 2008).
Characteristics of the audit environment suggest that engagement teams will
commonly encounter inadequate budgets. In accordance, empirical evidence from the 1990s shows that engagements are under-budgeted on average by at least 10 percent. (Bedard & Ettredge, 2008). One of these characteristics is the top-down process of budget setting.
Audit budgets for continuing engagements are formed by reviewing earlier
performance and making changes according to client characteristics (Fleming 1980; Sweeney & Pierce 2004). The previous year’s audit program and time budget is a starting point for designing the following year’s program and budget (Bedard, Mock, & Wright, 1999). Previous research characterizes audit budget setting as top-down process, with insufficient participation of subordinates who actually perform the fieldwork (tests that meant to gather evidence on the project). While audit seniors may be the ones that allocate total budgeted hours across audit tasks, they do not have much influence on determining total amount of engagement hours (Otley & Pierce 1996; Pierce & Sweeney 2004; Bedard & Ettredge, 2008).
Previous research identifies another factor leading to inadequate time budgets: the dilemma of balancing audit quality and audit costs (Pierce & Sweeney, 2005). An increase in quality most likely means an increase in labor hours, and therefore an increase in audit costs.
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Because of this reason auditors are pressured to commit all sorts of dysfunctional auditor acts to keep budgets low (Bedard & Ettredge, 2008).
In addition to audit environment characteristics, cultural factors of a country may also have an impact on budgets and perceived budget pressure.
2.2 Worldwide dissimilarities
According to Birnberg and Snodgrass (1988) culture consists of several aspects, such as attitudes, beliefs, values, and norms. These elements of culture affect the behaviour of the people living within in a society and they might be reflected in the management accounting practices of that society.
Several accounting researchers have investigated the relationship between national culture and aspects of financial control. Many of these studies used Hofstede’s six dimensions of national cultures to determine the relationship between the country’s culture and the
effectivity of management control measures (Harrison, 1992; Chow, Shields & Chan, 1994; Ueno & Wu 1993). The results of these studies have been inconclusive and only managed to partially define the relationship between the two variables. For example, Chow, Shields and Chan (1991) found very little evidence for national culture determining preferences for managerial controls. Ueno and Wu (1993) found that the cultural dimension of individualism explained some variation in budgetary practice but the dimension of uncertainty avoidance did not. Harrison (1992) did find a relationship between the effect of budgetary participation and Hofstede’s power distance and individualism dimensions. Goddard (1997) established a significant and complex relationship between organizational culture and budget related behaviour at the level of the individual manager.
Despite all the efforts mentioned above, international evidence on time budget pressure and its consequences is not widespread and there has not been any recent attempt at investigating time budget pressures in less developed and/or developing countries, where the economic, social and work environment might be different and where direct professional oversight and other local regulatory accounting and auditing frameworks might still be absent or at an early stage of development. The fact that most studies were done in developed
countries like the US and Ireland provides little evidence as to whether the impact of these variables can be generalized to a wider context, such as to a developing or developed country. Therefore we would expect dysfunctional auditor behaviour due budget pressure to be
different in audit firms around the world (Chengabroyan & Soobaroyen, 2006).
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procedures in developing countries is very limited. She attributed such absence to practical problems for researchers, like access to company data and language difficulties. Nevertheless, she stated that the convergence between developed and developing countries concerning management information and decision-making approaches might not be succeeding through business globalization. According to her this is because of the constraints of a developing country’s socio-economic environment. On the other hand, those globalization forces that are characterized by the spread of international standards from developed to developing countries (auditing standards for example) should have led to a merging of management practices.
2.3 Dysfunctional auditor behaviour
As mentioned in the previous sections, both the audit environment and national culture may affect budget practice. One way it might affect budget practice is through dysfunctional auditor behaviour. Dysfunctional auditor behaviour can be measured in a number of ways. In this thesis the focus is on underreporting of chargeable time and premature sign-off.
2.3.1 Underreporting of chargeable time
If chargeable time is underreported, auditors report fewer hours than they actually utilized to complete a specific task. This measure may be undertaken in response to competitive (Marxen, 1990) and stressful (Kelley & Margheim, 1990) conditions within the firm. This behaviour is considered to be dysfunctional auditor behaviour (Rhode, 1978). If the auditor reports the actual time spent and therefore exceeds the audit budget, it may signal poor
performance or even incompetence to the management of the firm. Thus, auditors might think that underreporting is the only viable solution to an unachievable time budget.
Although underreporting of chargeable time is prohibited by the formal policies of many firms (Rhode, 1978) and the auditing profession (Commission on Auditor's
Responsibilities, 1978; National Commission on Fraudulent Financial Reporting, 1987), research has shown that the auditor is often not punished within the formal incentive structure unless the underreporting reaches high levels (Swieringa & Moncur, 1972; McNair, 1987). In fact, Dirsmith and Covaleski (1985) state in their research that underreporting is a part of the firm's informal communication structure and is viewed as a way to show loyalty to the
management of the firm. Although these studies provide different explanations for the issue of underreporting, according to Ponemon (1992) they all indicate that it may serve a unique purpose within the audit setting when cost and quality tradeoffs are a fact.
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However, underreporting often causes an ethical dilemma for the auditor because in addition to it being considered to be a violation of firm policy and written standards, it may violate the norms of colleagues or go against the auditor’s own beliefs or values. Therefore, some auditors actually will choose to report honestly, even if their reputation suffers from it (Kelley, Margheim & Pattinson, 2005). Of course, the ethical value of underreporting most likely varies across countries and therefore is expected to affect the occurrence of
underreporting.
In some cases, the additional time spent above the budgeted hours may be billable. That is a decision usually made at the level of the partner. However, underreporting bypasses the partner's authority as less experienced auditors write-off a portion of their chargeable hours. In addition to the potential loss of revenue for the firm, client retention decisions may also be affected. This is because underreporting makes it difficult to determine which clients might be undesirable due to repeated write-downs of chargeable hours spent. Because time budgets are often based on the number of hours reported on the previous year's work (Kelley & Seiler, 1982; Pasewark & Strawser, 1994), underreporting may result in unrealistically low time budgets. As a result, time pressures from these unrealistic budgets may lead to continued underreporting, assignments not being completed on a timely basis, and even shortages of available personnel (Chye Koh, Killough & Shapeero, 2003).
2.3.2 Premature sign-off
Another form of dysfunctional auditor behaviour is premature sign-off. Premature sign-off occurs when the auditor does not have enough time left in their budget to complete all audit procedures and decides to finish the project off without doing everything that’s required. Examples include rejecting awkward items from the sample, accepting doubtful audit evidence, and not testing all of the items in a sample, reduced work on certain audit procedures, failure to research accounting principles, substitution of weaker evidence, acceptance of weak client explanations of exceptions, and/or superficial reviews of client documentation (Chengabroyan & Soobaroyen, 2006).
Unlike underreporting, premature sign-off directly affects audit quality. Graham (1985) concluded that audit failure occurred more often due to emission of audit procedures rather than procedures not being applied to a sufficient amount of items. Audit failures do not only increase litigation costs of CPA firms but may also affect their ability to keep
experienced employees. In addition, if experienced employees leave they will have to be replaced by employees with less experience. Hence, the chance that the performed work will
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be of inadequate quality increases (Chye Koh, Killough & Shapeero, 2003).
One of the most quoted studies on the topics of audit quality, audit failures, and auditors' responsibilities is the report of the Cohen Commission (1978). One of the Cohen Commission's conclusions was that time budget pressures were a major cause of below standard audits. This conclusion was reached primarily on the basis of a questionnaire survey conducted for the Commission, referred to as the Rhode study. This survey analyzed the independent auditor's work environment by using a sample of respondents drawn from the membership roster of the AICPA. Including members of national, regional and local firms. Almost 58 percent of the respondents had, at one time or the other, resorted to premature sign-offs. However, 80 percent of those who signed-off prematurely did so infrequently and
because they were satisfied with the extent of their procedures. Auditors at the staff level were perceived to be more susceptible to premature sign-offs. The premature sign-offs were
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3. Literature review
In this section the literature that is needed to answer the research question will be discussed and compared. At the end of each paragraph a table is presented with a summary of the key data.
3.1 Underreporting of chargeable time 3.1.1 US
This literature review will start with the statistical results of Kelly and Margheim (1990) obtained in the US. Two offices of one Big 8 firm and one office of another Big 8 firm participated in the study by providing a list of audits conducted by their individual offices over a recent three-month period. The staff and senior auditors answered questions
concerning the extent of dysfunctional auditor behaviour the respondents had engaged in and the time pressure they received alongside other questions that are not relevant for this thesis. Their results indicate that there is an inverted U-shaped relationship between time budget pressure and the underreporting of audit time. This points out that greater amounts of pressure cause increased underreporting until a point is reached when the time budget is simply
unattainable and staff auditors feel less pressured to engage in underreporting of time to meet the budget. Therefore, audit managers and partners should be particularly concerned with the possibility of underreported time and incorrect or poorly documented audit work papers when the time budget on the audit is very tight but the audit team is able to complete the audit within budget. Further examination also indicated that the percentage of underreported time was greater on smaller audits.
Another study from the US by Akers, Eaton and Horngren (1998) states that although most public accounting firms have policies that prohibit underreporting chargeable hours, the findings of the study show that accountants at all levels continue to underreport. While the majority (65.9%) of the respondents stated that they believe that underreporting chargeable time is unethical, the majority (71 %) still does not report all chargeable hours. This
contradictory behaviour appears to arise from the will to receive better periodic performance evaluations, be viewed as competent by superiors and receive promotion and advancement. The surveyed auditors also indicated that underreporting time did not contribute to their personal growth, in fact it led to job dissatisfaction and negative feelings about themselves.
The researchers gave three possible explanations as to why management of public accounting firms continues to tolerate the underreporting of chargeable time. The first
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and procedures prohibit such behaviour. Second, competition for clients forces firms to keep rates low and third, firms actually benefit from underreporting because most fee arrangements are fixed.
A third study from the US by Margheim and Pany (1986) took a different approach. They measured underreporting in the Big Eight firms and compared it to results from non-Big Eight auditors. They found that non-Big Eight auditors were more likely to underreport than auditors from Big Eight firms. Firm specific control standards were therefore better in Big Eight firms according to their results.
3.1.2 Ireland
The first piece of evidence from Ireland (Otley & Pierce, 1996) suggests a higher level of underreporting of time than that reported in earlier US studies. These findings suggest that participants in this study are less likely to respond to inadequate budgets in a functional manner (ask for more time or work harder) and are more likely to respond in a dysfunctional manner than their US counterparts. The time period between the studies could have been a contributing factor according to the writers, since time pressure on auditors has been found to be increasing over time (Cook & Kelley, 1988). However, the amount of dysfunctional behaviour reported in a more recent US research by Kelley and Margheim (1990) (discussed in section 3.1.2) using very similar methodology still appears to be considerably lower than that found in this research from Ireland. Another reason may be that the problem of auditor dysfunctional behaviour has been brought to light and emphasized by research studies in the US. Thus firms in the US may have taken measures to explicitly prohibit such behaviours and required punishments and sanctions against offenders. And perhaps they have tightened controls to help reduce the occurrence of such behaviour. This heightened awareness may have succeeded in reducing the frequency of dysfunctional behaviour, and would almost certainly increase the reluctance of respondents in admitting to such behaviour according to the writers.
The second piece of evidence from Ireland that will be discussed is by Arnold, Pierce and Sweeney (2009). They mention that subjects from Ireland and the U.S. have been
included in previous studies of moral reasoning and similar levels of moral reasoning have been found for accounting students from both countries (Clarke, Eynon, Hill, & Stevens, 1997). And for practitioners from both countries, it led to some mixed results (Arnold & Bernardi, 1996; Clarke, Hill & Stevens, 1998). They mention that while no previous study on dysfunctional behaviour has included subjects from both Ireland and the U.S., a comparison
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of the findings from the researchers in the two countries mentioned above suggests that the level of dysfunctional auditor behaviour, which includes underreporting of chargeable time, in the U.S. may be lower than in Ireland. They state that the broader environment in the U.S. went through recent audit failures such as Enron and the introduction of the Sarbanes–Oxley Act of 2002 which further emphasized audit quality, these may have heightened the
awareness of ethical dilemmas with U.S. auditors.
However, their own research results were a bit different than expected when speaking of underreporting of time. Perceived unethical pressure was positively related to intention to underreport, indicating that greater perceived pressure to engage in underreporting of
chargeable time was significantly related to greater intentions to engage in unethical actions in both countries. The findings also indicated a substantial amount of differences between the countries. U.S. respondents reported higher ethical evaluations in all the surveys on
underreporting of chargeable time, but their intentions of engaging in the behaviour was not significantly lower than Irish respondents. An explanation for this fact is that underreporting of time was evaluated as the least unethical behaviour with respondents expressing the highest intentions of engaging in this behaviour. This is consistent with earlier research by Pierce and Sweeney (2006) that states that underreporting of chargeable time is not considered to be unethical behaviour by most auditors surveyed by them in Ireland. Overall, the findings indicate that country differences appear to have, at least, some impact on the ethicality of employees in these firms. It would, therefore, be invalid to assume that because US firm’s procedures and policies are consistently stated on a worldwide basis, they will be
implemented consistently with similar impact across national boundaries (Arnold, Pierce & Sweeney, 2009).
3.1.3 Mauritius
The research by Chengabroyan and Soobaroyen (2006), which surveyed auditors from all levels from 20 different audit firms in Mauritius, showed that the underreporting frequency distributions provided some significant results. 77% of respondents agreed or strongly agreed to the fact that auditors take their unfinished work home and do not report the time. Also, 73% of respondents said that auditors deliberately underreported chargeable time occasionally to frequently. Although the questions asked in previous studies from other countries were slightly different, it is noted that the percentage of respondents who used underreporting to deal with time budget pressures were significantly lower for other countries, for example, 54% for Ireland (Otley & Pierce, 1996) and 33% for the United States (Kelley & Seiler,
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1982). The difference in attitudes toward underreporting behaviour would be related to the fact that respondents were less willing to consider, or were unaware of, the long-term implications of underreporting. Underreporting of chargeable time could be viewed as a simple and risk-free approach to stay in their time budgets. In fact, underreporting is most likely encouraged by the supervising seniors. There were significant differences with the supervisory or managerial staff being more agreeable to underreporting of chargeable time on average, compared to lower levels of the hierarchy. In an increasingly competitive
environment where audit assignments are now expected to be profit centers on their own and which therefore cannot be subsidized by non-audit fees, the high level of underreporting of time appeared to have become the norm now.
In conclusion, the research by Chengabroyan and Soobaroyen proved through responses to underreporting of chargeable time in general, that there was evidence that underreporting of chargeable time practices have become more widespread, but less in
response to instances of budget tightness. This contradicted previous findings. Although there could be other independent variables of interest leading to underreporting of time, the results obtained in the context of Mauritius indicate that underreporting of chargeable time is
becoming more of an institutionalized practice, with superiors encouraging it for their own evaluation. According to the writers, underreporting of chargeable time appeared to be a clearly persistent practice within audit firms in Mauritius and it seemed the long-term
consequences of underreporting were not known yet amongst audit staff. In the long term, an elaborate use of underreporting practices would weaken access to this basic business data and it would generate an increasing distortion of the reality for those who are a part of the
evaluation of the audit assignment and the audit staff. Auditors’ perceptions of budget tightness were more related to external variables such as size of the market, industry and regulatory constraints and financial dependence on audit fees than internal variables. The developing country context thus appears to be a valid variable of influence.
Based on the findings and in consideration of one of the motivations for this study, it is believed that there are developing country factors that do influence budget tightness and underreporting of time. In particular, one potential difference in the Mauritian context compared to other surveyed countries is the absence of a local registration and disciplinary body for accountants and auditors. Although this is now being addressed in the new
legislation, Mauritius had always been a locally ‘unregulated’ environment for auditors. The World Bank (Gielen, Rhaman, & Talai, 2003) reported that the accountancy profession was not properly organized, had only to follow the code of ethics of the relevant professional
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body abroad and their exposure to litigation risk was not significant. There had never been a court case involving auditors and shareholders or other stakeholders on issues of negligence or improper malpractice. As a result, it was stated that this loose regime of regulation and the absence of a local disciplinary body to investigate accountants and auditors’ actions
(compared to those in the US and Ireland) could increase perceptions and actions relating to the underreporting of time (and premature sign-offs).
3.1.4 Malaysia
Ismael, Paino and Smith (2010) surveyed 244 auditors working in small/medium and big audit firms in Malaysia. Their results showed that both groups, partners and seniors and staff and seniors, resort to underreporting of time to cope with time budget pressure. The group of partners and managers, at least sometimes, tend to underreport either by working in personal time, by shifting time to non-chargeable time or by shifting time to a different client
respectively. The seniors and staff group reported higher percentages on the same dysfunctional responses. These high percentages may be interpreted as a warning that underreporting is a common practice amongst auditors from all hierarchy levels in Malaysia. This tendency might be a strategy for avoiding budget overruns by the staff and senior group. The group of partners and managers reported to sometimes underreport at a percentage lower percentage than the group of seniors and staffs. Accordingly, audit personnel holding
relatively lower ranks (staffs and seniors) are sometimes responding to time budget pressure with extreme measures.
As budget attainability is significantly positively related to performance evaluation (Kelley & Seiler, 1982; Cook & Kelley, 1988; Otley & Pierce, 1996), respondents from the research were asked direct questions on the perceived importance of budget achievement in the evaluation of performance. Results showed that budget achievement is seen by many respondents as being critical for a successful career in auditing. Respondents stated that budget achievement is given too much importance in the overall evaluation of performance. It is observed that time budgets are perceived to be “very important” to “quite important”. Surprisingly, when desired importance of budget achievement in the overall evaluation of performance is measured, half of the respondents observed a lower level of importance: ‘of some importance’. There seems to be a general acceptance that a certain amount of budget pressure is an unavoidable fact of life in auditing firms. The managers also felt that ideally budget achievement should be ‘of some importance’ with respect to their performance evaluation.
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Table 1: Underreporting of chargeable time
US Ireland Mauritius Malaysia
Budget pressure Budget pressure causes an increase in underreporting of time Budget pressure causes an increase in underreporting of time Budget pressure causes an increase in underreporting of time, but the influence is
decreasing over time (Chengabroyan & Soobaroyen, 2006) Budget pressure causes an increase in underreporting of time Ethical evaluation Majority (65.9%) considers it to be unethical (Akers et al., 1998) Lower amount of auditors compared to US considers it to be unethical (Arnold et al., 2009) Underreporting has become the norm, upper level auditors more agreeable than lower levels to underreporting (Chengabroyan & Soobaroyen, 2006)
Prevalence Majority (71%) engages in the act (Akers et al., 1998) 33% of audit seniors engages in the act (Kelley & Seiler, 1982)
Intentions of engaging in the behaviour similar to US (Arnold et al., 2009) Amount of underreporting higher than in the US. Audit seniors report a percentage of 54% (Otley & Pierce, 1996)
77% of respondents agreed or strongly agreed to underreporting (Chengabroyan & Soobaroyen, 2006) 47% reported to at least sometimes engage in underreporting (Ismael et al., 2010)
Firm size Non-Big Eight auditors more likely to underreport than Big Eight auditors (Margheim & Pany, 1986)
Respondents from Big 4 firms reported significantly lower intentions to
underreport than non-Big Four respondents (Arnold et al., 2009)
Respondents from Big 4 firms reported significantly lower intentions to underreport than non-Big Four respondents (Ismael et al., 2010) Control environment Underreporting problem emphasized in research, firms take measures to prevent and punish such behaviour (Arnold et al., 2009)
Also subject to several scandals and increased scrutiny, but still less than in the US. Differences in the work environment. (Arnold et al., 2009) ‘Unregulated’ environment for auditors, exposure to litigation risk is not significant (Chengabroyan & Soobaroyen, 2006) Effectiveness of regulatory institutions is questionable, no litigation cases against auditors in Malaysia. High emphasis on budget attainment (Mohd Nor, 2011)
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Through table one a comparison can be made between the countries. In all of the countries mentioned, budget pressure causes an increase in the frequency of underreporting of chargeable time. However, the research by Chengabroyan & Soobaroyen (2006)showed a different result.Underreporting of chargeable time has become such a common phenomenon in Mauritius that the frequency of underreporting is becoming less dependent on budget pressure over time.
The study by Arnold, Pierce and Sweeney (2009) states that the amount of US auditors that consider underreporting to be unethical is higher than in Ireland. The reasons that Arnold, Pierce and Sweeney give is that the broader environment in the U.S. went through recent audit failures and the introduction of the Sarbanes–Oxley Act of 2002 which further emphasized audit quality may have heightened the awareness of ethical dilemmas with U.S. auditors. It would, therefore, be invalid to assume that because US firm’s procedures and policies are consistently stated on a worldwide basis, they will be implemented consistently with similar impact across national boundaries. This might explain the higher ethical evaluations of US auditors.
However, there is not much research available on ethical evaluations of underreporting of time in Malaysia and Mauritius. It would be beneficial to research this subject as it of importance to know if auditors continue to evaluate underreporting as an unethical act as even if there is no proper mechanism of oversight and low risk of litigation.
The results of Otley & Pierce (1996) state that Irish auditors engage more in
underreporting than auditors from the US. But this is not in accordance to the results of the more recent research by Arnold, Pierce and Sweeney (2009), they reported that the intentions of engaging in the act are similar. A possible reason why there is a difference between the study by Otley & Pierce and Arnold, Pierce and Sweeney would be the increasing time budget pressure that auditors seem to experience over time (Cook & Kelley, 1988). This would explain why the percentages of the more recent study by Arnold, Pierce and Sweeney are higher than Otley & Pierce’s percentages.
Chengabroyan & Soobaroyen, 2006 reported an underreporting percentage of 77% which they compared to 54% for Ireland (Otley & Pierce, 1996) and 33% for the United States (Kelley & Seiler, 1982). However, the results of Mauritius contained auditors from all levels of the hierarchy, not just audit seniors like the study of Ireland and the US.
A few of the reasons that Chengabroyan & Soobaroyen give for the large difference are the unregulated environment for auditors in Mauritius, the lack of exposure to litigation risk and the lack of knowledge about the consequences of dysfunctional auditor behaviour.
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Ismael, Paino and Smith (2010) from Malaysia also reported higher percentages in their study compared to the 33% of Kelley and Seiler from the US. The reason they give is that budget achievement is seen by many respondents as being critical for a successful career in auditing.
Another research in Malaysia by Mohd Nor (2011) explains the flaws in the audit environment in Malaysia. There have been no litigation cases in Malaysia against auditors and mechanisms of oversight do not function properly. Further explanation will be given in the section on premature sign-off. This might explain the higher percentage compared to the US.
As Margheim & Pany (1986) state, Non-Big Eight auditors are more likely to underreport chargeable time than Big Eight auditors.They stated that it is because of the better control standards of the Big Eight firms that underreporting is less frequent in their firms.
There is also not much research in Mauritius and Malaysia on the difference in the frequency of underreporting of chargeable time between Big Four auditors and non-Big Four auditors. This research would be beneficial as it will show if Big Four firms still report higher ethical evaluations and less underreporting (like in the US studies) in an environment without proper oversight and a low risk of litigation.
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3.2 Premature sign-off 3.2.1 US
The first research that will be discussed is by Raghunathan (1991). He surveyed auditors from all levels in offices of Big Eight accounting firms. Although 45 percent of the respondents said they never signed-off prematurely, the number admitting to signing-off prematurely, alongside a sequence of responses ranging from very rarely to very frequently, is significant at 55 percent. This number is close to the 58 percent reported in the Rhode study but much higher than the 31 percent reported in the Alderman and Deitrick (1982) study.
The reasons why there is a difference in the numbers is that the higher percentages reported in the present study and the Rhode study only include the responses of those (25 percent in this study) who had very rarely (perhaps just once) signed-off prematurely. On the other hand, the 31 percent reported in the Alderman and Deitrick study includes the responses of only those who agreed with the general statement that premature sign-offs do occur.
Seventeen percent of their respondents were undecided as to whether or not premature sign-offs occur at all. The lower percentage reported in the Alderman and Deitrick study may thus be attributed to the exclusion of respondents who believed that premature sign-offs occur so very rarely that they do not perceive them as a common occurrence. However, among the 55 percent of the respondents who admitted to premature sign-offs, approximately 73 percent reported that they had done it only very rarely or rarely. Therefore, on an overall basis, 85 percent of the respondents reported that they either never, very rarely, or rarely signed-off prematurely on audit program steps.
In addition, the results show that it is low risk (of not detecting material errors), rather than time pressure that was most frequently stated as the reason for engaging in premature sign-off. This finding is indirectly supported by another result from the study which suggested that premature sign-offs also occur in tasks undertaken in the earlier stages of the audit
process. This implies that premature sign-off is frequently likely to be the result of factors other than the typical, busy season stress to meet time deadlines. Results also indicate that seniors are the level of audit personnel most likely to resort to premature signing-off compared to the other levels of audit personnel.
3.2.2 Malaysia
Ismael, Paino and Smith (2010) found that 57 per-cent of the 244 auditors surveyed by them in Malaysia admitted to signing off pre-maturely. The surveyed auditors were comprised of 131 audit staff; 18 audit seniors; 80 audit managers and 15 partners of firms, ranging from
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small and medium size to Big Four firms. This study shows a high occurrence of premature sign-off practices among the auditors they surveyed compared to Otley and Pierce (1996) and Coram, Ng and Woodliff (2003).
Mohd Nor (2011) gives a possible reason for the higher frequency of premature sign-off compared to the US that they also found. According to them it could be weak enforcement by related agencies, such as the Malaysian Institute of Accountants (MIA). Although there is ‘The Financial Statements Review Committee’ established under MIA to ensure published accounts comply with legal and professional requirements, the effectiveness of this committee is questionable (Tay, 1995). Further, the findings of the committee were not made public and so were not subjected to scrutiny by legal, financial or public oversight (Houghton, Johl & Jubb, 2007). In addition to that, the MIA is said to have failed to take disciplinary action against errant auditors (Ali, Lee, Rasit & Sahdan, 2006; Tay, 1995) and there have been no litigation cases against auditors in Malaysia (Houghton et al., 2007).
3.2.3 Australia
The study by Coram, Ng and Woodliff (2003) found that participating auditors experience high time-budget pressures, with more than half suggesting that time budgets were adequate only “sometimes”. Many auditors reported colleagues using various reduced audit quality practices. About the same percentages participants in this study admitted to having used premature sign-off at some time as in the US. The main reasons given were that the work being performed was low-risk and that there was high time budget pressure.
A number of issues arise from the results. Consistent with studies performed overseas, it seems that auditors in Australia face a fairly high level of time budget pressure. This
pressure appears to be associated with reduced audit quality behaviours. This is important for the profession, as AUP 32 and Professional Statement F6 Professional Fees effectively state that firms should not set budgets that are unrealistic (although they can be tight to improve performance). It should be noted that although any reduced audit quality act is of concern, the incidence of reduced audit quality practices was found to be low. Further, evidence of reduced audit quality does not mean that the audit opinion will be incorrect. However, the work
performed by audit seniors does form the basis for the audit opinion. If there is a high level of reduced audit quality the probability of an inappropriate audit opinion will be increased.
Another concern highlighted by this study is the number of auditors who said they used reduced audit quality practices because they judged the audit area to be “low risk”. Considering the work to be low-risk does not justify the use of reduced audit quality practices.
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However, the results shows that if auditors inappropriately speed up testing, they at least do it where they perceive the likelihood of an error is lower. The writers state that the results are consistent with research undertaken in the UK and the US.
3.2.4 Mauritius
The research that will be discussed is by Chengabroyan and Soobaroyen (2006). 52 qualified staff from a cross section of local audit firms, which includes Big 4 representatives, were surveyed. The results confirm, to some extent, the World Bank Report’s anecdotal comments on the existence of audit time budget pressure in Mauritius. The extent of this budget
tightness pressure was significantly lower compared to other surveyed countries and it is argued that this is due to some of the developing country ‘realities’. Although there could be evidence of a stronger competitive environment for audit assignments in certain specific areas (the African markets), the existence of closer business and family relationships could be allowing for an ‘implicit’ sharing of audit assignments among the audit firms, thereby altering levels of budget tightness.
It is concluded that budget tightness does significantly lead to premature sign-off. There were also some indicative signs of the inverted U-shaped relationship, in the sense that premature sign off would first increase as budget tightness increased but eventually premature sign-off would decrease at higher levels of budget tightness. The variations in the perceived levels of premature signoff across different audit areas was also a notable result as it would enable peer practice reviewers and regulators to focus on key areas with higher probabilities of premature signoff. Hence, it was believed that the absence of local professional oversight and regulation has had some influence on the level of premature signoff. It would therefore be of interest to investigate premature sign-off levels a few years after the establishment of a regulatory framework according to the writers. Based on the findings and in consideration of one of the motivations for this study, it is believed that there are developing country factors that do influence the extent of engaging in premature sign-off.
3.2.5 Uganda
The research of Kasigwa, Munene, Nkote and Ntayi (2013) provides evidence which shows that reduced audit quality behaviour is a problem in Uganda, because 94 percent of all the auditors involved in this study admitted to engaging in at least one type of reduced audit quality behaviour (including premature sign-off). The writers provided no specification on the reasons for premature sign-off. This may suggest that auditors continue getting involved in
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unprofessional behaviour, which could have a negative effect on the audit opinion. The respondents justified their involvement in these acts with various reasons which included; favorable performance appraisal, budget constraints and profit motive.
The results seem to suggest that different reduced audit quality acts are viewed as unequal by auditors. The results are in agreement with Herrbach (2001) and Coram, Ng and Woodliff (2003) who found that specific acts that reduced audit quality acts differ in their levels of occurrence. The results also agree with Coram, Glavovic and Ng (2008) who found that reduced audit quality acts vary because of differences in moral intensity, and this explains why some acts are more frequently engaged in than others. They found that differences
existed in perception about reduced audit quality acts relating to the magnitude of the
consequences for the auditors. This is consistent with Jone’s (1991) model of moral intensity which posits that the attributes of a moral dilemma affect multiple components of the ethical decision making process. The study found that reduced audit quality behaviour is a
widespread problem.
Auditors seem to justify moral disengagement on grounds of risk, thus creating a situation where some procedures are viewed as being more important than others. This justifies the skipping of such procedures in order to concentrate on what is considered more important audit steps. This has been attributed to lack of supervision created by partners taking up more jobs than they can supervise and to the desire to maximize profit. Reduced audit quality behaviour seems to be a coping mechanism that enables auditors to overcome budget constraints. Such a justification allows behaviours that are otherwise not allowed by the auditing standards. This implies that when auditors are faced with time or other pressures they tend to concentrate on areas and procedures they consider risky exposing the less risky areas to material misstatements. This means that the cumulative errors in relatively less risky areas can amount to a material error that can mislead the users of the financial statements. This is a dangerous trend which shows that a number of material misstatements may have gone undetected simply because they fall in areas that auditors consider as being low risk.
As explained by Kasigwa (2014) Uganda has one of highest perceived levels of corruption after scoring 26 on the 2013 Transparency International corruption scale. The index scores 177 countries on a scale from 0 (highly corrupt) to 100 (very clean). This placed Uganda in position number 140 out of 177 countries, making it one of the worst performing countries.
The auditing profession in Uganda is one of those that have faced a lot of criticism because of their failure to detect cases of fraud both in Government and private institutions.
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Mwenda (2013) reported that between 2009 and 2012, a total of 340 billion that was meant to be paid as pension to former retired Government of Uganda workers had been paid to 3000 non existing workers. 60 billion had been misappropriated in the Office of the Prime Minister during the financial years 2010 to 2011 and 2011 to 2012. Mwenda wondered how it was possible that officials from the office of the Prime Minister, Accountant General’s office, central Bank, internal and external auditors managed to work together to have this money siphoned without any detection. Therefore, auditors’ failures to report frauds have been linked to reduced audit quality behaviour.
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Table 2: Premature sign-off
US Malaysia Australia Mauritius Uganda
Budget pressure Budget pressure causes an increase in premature sign-off, but low risk was a bigger factor (Raghunathan, 1991) Budget pressure causes an increase in premature sign-off Budget pressure causes an increase in premature sign-off, but low risk was a bigger factor (Coram, Ng & Woodliff, 2003) Budget pressure causes an increase in premature sign-off Budget pressure causes an increase in premature sign-off, but low risk was a bigger factor (Kasigwa et al., 2013) Ethical evaluation Social consensus on the fact that premature sign-off is unethical (Arnold et al., 2009) High degree of social consensus that premature sign-off is unethical (Coram, Glavovic & Ng, 2008) Prevalence A significant amount of 55% engages in the act (Raghunathan, 1991) 84.1% admitted to engaging in the act at least sometimes (Mohd Nor, 2011) 57% admitted to engaging in the act (Ismael et al., 2010) Similar frequency as in the US (Coram, Ng & Woodliff, 2003) Higher percentage compared to the US (Chengabroyan & Soobaroyen, 2006) Premature sign-off is a widespread practice (Kasigwa et al., 2013)
Firm size Big Four firms less likely to sign-off than smaller firms (Rhode, 1978) Control environment Premature sign-off problem emphasized in research, firms take measures to prevent and punish such behaviour (Arnold et al., 2009) Effectiveness of regulatory institutions is questionable, no litigation cases against auditors. Higher emphasis on budget attainment compared to the US. (Mohd Nor, 2011) High budget pressure compared to other surveyed countries (Coram, Ng & Woodliff, 2003) ‘Unregulated’ environment for auditors, exposure to litigation risk is not significant (Chengabroyan & Soobaroyen, 2006) ‘Unregulated’ environment for auditors, exposure to litigation risk is not significant, corruption (Kasigwa et al., 2013)
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Through table two a comparison can be made between the countries. In all countries budget pressure is a factor that increases premature sign-off. However, in the US, Australia and Uganda low risk proved to be a bigger factor in increasing premature sign-off. It is the low risk of material errors in certain audit procedures that increases the frequency of premature sign-off. Auditors do not consider the procedures to be risky and therefore skip over them (Raghunathan, 1991; Coram, Ng & Woodliff, 2003; Kasigwa, Munene, Nkote, Ntayi, 2013).
In the US and Australia auditors consider premature sign-off to be unethical (Arnold, Pierce & Sweeney, 2009; Coram, Glavovic & Ng, 2008). However, there is not much
information available on the ethical evaluations of Malaysian, Mauritian and Ugandan
auditors. It would be beneficial to research this subject as it of importance to know if auditors continue to evaluate premature sign-off as an unethical act as even if there is no proper mechanism of oversight and low risk of litigation.
Malaysian auditors face higher budget pressure than auditors from the US. The
emphasis put on budget attainment and it being a part of overall evaluation was higher than in the US. Ismael, Paino and Smith (2010) confirm than their premature sign-off percentages are much higher compared to Coram, Ng and Woodliff (2003) from Australia. The reasons why this is the case are given by Mohd Nor (2011). Weak enforcement by oversight mechanisms, the lack of disciplinary actions against Malaysian auditors and the lack of litigation risk for Malaysian auditors. But the studies performed by both Malaysian researchers show very different percentages. The occurrence of premature sign-off in Malaysia therefore requires much more research.
According to Coram, Ng and Woodliff (2003), Australian auditors deal with high budget pressure, which is consistent with research undertaken in the US. Therefore, there is not much difference in results between the US and Australia.
As explained by Chengabroyan & Soobaroyen (2006), Mauritius is a country that deals with an absence of a local registration and disciplinary body for accountants and auditors. Although this is now being addressed in the new legislation, Mauritius had always been a locally ‘unregulated’ environment for auditors. The World Bank reported that the accountancy profession was not adequately organised, had only to follow the code of ethics of the relevant professional body abroad and their exposure to litigation risk was not significant. As a result, the amount of premature sign-off is found to be higher than in the US and other developed countries.
Premature sign-off in Uganda is a widespread practice as stated by Kasigwa, Munene, Nkote and Ntayi (2013). Uganda is a country with a high amount of corruption and a lack of
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proper oversight mechanisms. Even accounting frauds by the government have gone unnoticed. These factors contribute to the fact that Uganda has a high frequency of auditors engaging in premature sign-off.
As mentioned earlier, there is not much information available on the ethical evaluations of premature sign-off from Malaysia, Mauritius and Uganda. It would be
beneficial to research this subject as it of importance to know if auditors continue to evaluate premature sign-off as an unethical act as even if there is no proper mechanism of oversight and low risk of litigation.
Also, there is a lack of research on the difference between non-Big Four and Big Four auditors concerning premature sign-off. This research would be beneficial as it will show if Big Four firms still report higher ethical evaluations and less underreporting (like in the US studies) in an environment without proper oversight and a low risk of litigation.
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4.1 General summary
It has been stated by several researchers that time budget pressure causes an increase in dysfunctional auditor behaviour in all countries. Dysfunctional auditor behaviour forms a threat to the quality of information provided by the auditors.
The answer to the research question of this thesis is therefore: yes, there is a difference in dysfunctional auditor behaviour caused by budget pressure between countries. Several factors such as the lack of oversight of auditors in developing countries and the amount of corruption that prevails in those countries have an effect on the amount of dysfunctional auditor acts. Countries like the US have been through several large accounting frauds and that may have heightened the awareness of ethical dilemmas with U.S. auditors and are therefore much more active in preventing and punishing such acts. That is why U.S. respondents reported higher ethical evaluations than Irish auditors. Overall, the findings indicate that country differences appear to have, at least, some impact on the ethicality of employees in these firms. It would, therefore, be invalid to assume that because US firm’s procedures and policies are consistently stated on a worldwide basis, they will be implemented consistently with similar impact across national boundaries.
However, this research was difficult to complete because of the general lack of research on this topic. There is enough literature available from developed countries such as the US and Ireland, but this research has not been conducted in many developing countries. Even if there was literature available on dysfunctional auditor behaviour in non-developed countries, the researchers did not provide a reason as to why their findings were different compared to those of developed countries. Therefore it was difficult to find arguments that could answer the research question.
This research is in accordance to the research by Mathews (2000), which states that research about management practices and procedures in developing countries is very limited. She attributed such absence to practical problems for researchers, like access to company data and language difficulties. Nevertheless, she stated that the convergence between developed and developing countries concerning management information and decision-making
approaches might not be succeeding through business globalization. According to her this is because of the constraints of a developing country’s socio-economic environment.
However, this thesis also has its limitations. Several topics such as the ethical
evaluations of the different dysfunctional auditor acts have only been discussed lightly in this thesis. There was not much information available on this topic, especially in developing
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countries. The same goes for the difference in the frequency of engaging in dysfunctional auditor behaviour between different levels of auditors, this research did not discuss those differences in detail. These are differences, like more experience or perceiving more stress, that most likely have an impact on the occurrence of dysfunctional acts.
The conclusion of this thesis is that dysfunctional auditor behaviour due to budget pressure is different across countries that are tested in this thesis and the testing of additional countries might reveal even more variances. Therefore, more research on this topic is needed. The next section will discuss a dilemma related to auditor judgement and potential solutions for the problem of dysfunctional auditor behaviour.
4.2 Auditor judgement
Evidence from the US, Australia and Uganda showed that auditors commit reduced quality acts, such as premature sign-off, in areas they consider to be of low risk. As previously discussed, Coram, Ng & Woodliff (2003) state that evidence of reduced audit quality acts does not mean that the audit opinion will be incorrect. However, the work performed by audit seniors does provide the foundation for the audit opinion and if there is a high level of
reduced audit quality the probability of an inappropriate audit opinion will be increased. Another concern highlighted by this study is the number of auditors who said they used reduced audit quality practices because they judged the audit area to be “low risk”. While assessing the work as low-risk does not justify the use of reduced audit quality practices, the response shows that if auditors inappropriately speed up testing, at least they do it where they perceive the likelihood of an error is lower.
However, Kasigwa, Munene, Nkote & Ntayi (2013) state that auditors seem to justify moral disengagement on grounds of risk, thus creating a situation where some procedures are viewed as being more important than others. This justifies the skipping of such procedures in order to concentrate on what are considered more important audit steps.
This has been attributed to lack of supervision created by partners taking on more jobs than they can supervise and the desire to maximize profit. Reduced audit quality behaviour seems to be a coping mechanism that enables auditors to overcome budget constraints. Such a justification allows behaviours that are otherwise not allowed by the auditing standards. This implies that when auditors are faced with time or other pressures they tend to concentrate on areas and procedures they consider risky, exposing the less risky areas to material
misstatements. This means that the cumulative errors in relatively less risky areas can amount to a material error that can mislead the users of the financial statements. This is a dangerous
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trend which shows that a number of material misstatements may have gone undetected simply because they fall in areas that auditors consider as being low risk.
Now this creates a point for discussion. How do we know if the auditor makes the right judgement on which procedures to concentrate on less? Unless there is a good
mechanism of oversight and risk of litigation, which is not the case in Malaysia, Uganda and Mauritius, we cannot depend on the judgement of the auditor. Apparently auditors in
Australia are good at weighing which procedures to complete and which not, because the amount of scandals compared to the amount of quality reduction practices seems to not be in proportion. Does this imply that Australian auditors are doing their job right? Kasigwa (2014) states that from the accounting firms’ viewpoint, the incidence of RAQ among junior auditors for any reason should be of concern. Firms should consider more professional development courses for auditors at lower levels to emphasize the importance of their work to the
formulating of the overall audit opinion. Firms should also address the issue of RAQ in their own internal quality control reviews. The profession should be particularly aware of the potential for RAQ practices in its peer review program. Although such practices may be difficult to detect, specific questions should be asked about how the firm attempts to prevent this behaviour. Senior auditors are of course better at evaluating risk than junior/staff auditors. Therefore, this subject requires more research. How do staff and senior auditors evaluate if an audit step is low-risk? Is there a proper oversight mechanism that evaluates the performance of the auditor after he completes his work? In the next section a few possible solutions to decrease the amount of dysfunctional auditor behaviour will be discussed.
4.3 Potential solutions
The first solution that will be discussed is brought forward by Mohd Nor (2011). Audit firms and the regulatory body, such as the Malaysian Institute of Accountants (MIA) should implement training programs, not only focusing on the technical accounting issues, but also on how to manage the stress in the auditing working environment. It is important that efforts be made to reduce stress in the auditing environment as the results of this literature review show that stress antecedents could influence the auditors’ performance, which consequently leads to unprofessional behaviour among the auditors. Failure to properly manage this issue could potentially lead to substandard audit quality. This is a measure that is not only
applicable to Malaysia, but to all countries that want to reduce the amount of dysfunctional behaviour. The implementation of training programs focusing on job stress, along with accounting technical training, will help auditors to mitigate the effects of stress. By helping
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the profession and organization to reduce the stress experienced by auditors, it may also minimize reduces quality acts. MIA can make stress management training part of their
Continuing Professional Education (CPE) programmes, which are mandatory for all members. In addition to that, firms and MIA should promote and support a healthy lifestyle program to reduce the stress among auditors. This approach should be implemented in all countries, since auditors from all surveyed countries suffer from budget stress.
The second solution Mohd Nor gives is that in order to reduce audit quality reduction acts, the MIA should make Peer Reviews mandatory to all its member firms. Currently, it is not a common practice for a firm to be audited by other firms. The Big four firms normally conduct a peer review process within their own branches. This could be another reason why the Big four firms are less likely to commit reduced quality acts as found in this study. Although the idea that one audit firm would be audited by another firm could be controversial, if the benefit of this practice could prevent the audit quality being compromised, then, efforts should be made by MIA to implement this process. Such a practice could also prevent those auditors that intentionally involve themselves in reduced quality acts, for the purpose of reducing the audit cost, from doing so. The amount of reduced quality acts may be reduced if they are aware that their audit work will be scrutinized by auditors from other firms.
However, would other audit firms be willing to review the work of another audit firm? Other audit firms will most likely not be willing to put in as much effort in the task compared to if the review task came from within the firm. It would most likely not matter to the
reviewer if another firm’s auditor does his work properly. This is of course different when the
reviewer is from the same firm.
Another flaw in this approach is the lack of client information that the reviewing firm has. All clients have specific characteristics that need to be taken into account when they are being audited. It is extremely difficult to provide the reviewing firm with the complete client history and characteristics. And on top of that, this is also not a smart move considering the reviewing firm is still competition. This peer review will reveal client information that is supposed to be confidential. The reviewing firm might take advantage of that information and take the clients away from the firm. Therefore, it is better to keep the peer review inside the firm. Of course, this approach should not only be applied to Malaysia. This is a measure beneficial for all countries suffering from dysfunctional auditor behaviour.
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A third solution Mohd Nor gives is that the MIA should be more serious when it comes to taking disciplinary action among its members. MIA is too lenient in terms of disciplinary action against errant auditors: MIA failed to take disciplinary action (Ali et al., 2006; Tay, 1995) and there were no litigation cases against auditors in Malaysia (Johl et al., 2007). This could be another reason for the high number of auditors being involved in reduced audit quality practices, as found by this study. Sanctions such as suspending auditors’ membership should be imposed on those who are involved in these kinds of behaviours. The penalty and disciplinary actions should be communicated to all auditors so that they are well aware of the consequences. MIA should be regularly promoting high standards of professional conduct, so that it can increase professional behaviour among auditors. This approach is applicable to all firms in this study, and should therefore be encouraged for the purpose of reducing reduced quality acts.
32 | P a g e 5. Conclusion
The research question of this thesis is: “Does dysfunctional auditor behaviour due to time budget pressure differ among countries?”. Dysfunctional auditor behaviour was measured by two criteria, underreporting of chargeable time and premature sign-off. This thesis is a literature review.
Time budget pressure causes an increase in dysfunctional auditor behaviour in the US. This amount was higher for Ireland because respondents from the US reported higher ethical evaluations of both dysfunctional acts and the increased emphasis and oversight on auditor behaviour due to several accounting scandals. Australia, as expected, reported similar
amounts of dysfunctional acts as the US. Uganda, Malaysia and Mauritius all reported higher amounts of dysfunctional compared to the developed countries mentioned above. This is due lack of oversight in the developing countries, corruption and several other factors such as the lack of knowledge about possible consequences. Therefore there is a difference in the
occurrence of dysfunctional auditor behaviour in different countries. Low risk also turned out to be a factor that caused an increase in dysfunctional auditor behaviour.
In this thesis several countries all over the world were researched on the frequency of dysfunctional auditor behaviour and what the possible reason could be that research shows different results. This thesis is thus of utmost importance since audit firms are multinationals with offices spread all over the world. Budget pressure may be higher in one country than in the other, this might lead to more dysfunctional acts in that country. This reduces the quality of information. This thesis is a literature review on this subject.
Therefore, further research on ethical evaluations of different types of dysfunctional auditor behaviour is required from developing countries. Also, and the difference in engaging in dysfunctional acts by auditors from different levels of hierarchy and the difference between auditors of Big Four firms and non-Big Four firms need to be discussed further.
This thesis also discussed some potential solutions brought forward by Mohd Nor (2011) to reduce dysfunctional auditor behaviour. Institutions responsible for oversight should make more training programmes available for auditors to learn how to deal with stress at work. Also, peer review should be made mandatory. If another branch audits the work of an auditor the auditor may be less willing to commit reduced quality acts. And the third solution is to increase disciplinary action against offenders and increase the emphasis on the
importance of professional conduct by regulatory firms. Also, a point of discussion was brought forward on auditor judgement in an environment with a lack of oversight.
