Impact of an Identity Conflict on Audit Quality
Master Thesis
Amar Suruliz Studentnumber: 2741415
Petrus Campersingel 19a, 9713 AC Groningen Tel: +316 1884 1276
E-mail: a.suruliz@student.rug.nl
Supervisor/University of Groningen, Faculty of Economics and Business Dennis Veltrop
June 22, 2019 Number of words: 6631
ABSTRACT
Prior literature claims that auditors’ professional identification contributes to audit quality behaviour while identification with the audit firm is threatening audit quality behaviour. The author therefore argues that a strong identification with both leads to an identity conflict in which these auditors exhibit significantly more quality threatening behaviour than other auditors.
However, professional identification was found to limit quality threatening behaviour and, more importantly, to moderate the positive association of audit firm identification with quality
threatening behaviour. Thus, auditors can identify strongly with both without exhibiting more quality threatening behaviour than auditors without a strong bilateral identity. Professional
identification is essential to ensure audit quality, regardless the degree of audit firm identification.
Keywords: audit quality threatening behaviour, professional identification, audit firm
INTRODUCTION
External auditors meet their public interest obligation by providing quality audits to guarantee the right functioning of the economy (Wines, 2012). The reputation of these auditors is largely based on their independence that enables them to reduce uncertainty and set up objective, true and fair firm accounts. This reliance on auditors’ independence creates comfort by reassuring all with a financial interest in companies that the external audit provides an objective watch in the prepared and presented way of the financial statements. It enables stakeholders to limit and manage risks (Sikka, 2009). Therefore, external auditors are hired by clients for a fee to examine their financial reports. To provide an unbiased and thereby meaningful opinion on the financial reports, auditors are expected to be independent from their clients (Guo, 2016). The credibility in the auditor’s opinion is damaged by unforeseen corporate frauds and failures. It shows that firms are not assured by unqualified audit opinions and suggests that auditors don’t possess the necessary independence to set up true and fair accounts (Sikka, 2009).
In the 1970s, the increased number of capitalist firms gave public accounting firms the chance to deliver several consulting services. Auditors left the concept of objectivity and neutrality to advocate and advise capitalist firms, since these earnings exceeded the revenues from traditional auditing and tax services (Colson, 2004). With the increased commercial activities, the criticism also increased that the commercialization of the audit profession, with auditors placing audit firm’s commercial interests above upholding professional standards (Guo, 2016), undermined audit quality. This arousal reached its peak with the Enron scandal in 2002 (Colson, 2004), in which auditors that profited greatly from having Enron as its client, were held accountable for not carrying out their audit work. Audit partners’ focus on increasing revenue were outstanding grounds for Enron’s fraud.
Ever since the Enron fraud, the risks of commercialization in audit firms have taken centre stage in audit research and corporate practice (Broberg et al., 2018). It is not only increasingly
acknowledged that the commercialistic focus on audit firms, with auditors focusing primarily on attracting clients, undermines audit quality (Broberg et al., 2013), but also that this is most likely to occur when auditors put audit firms’ interests above upholding professional standards (Chesser et al., 1994). Young (2006) even argues that regardless of auditors’ tendency to uphold
audit, hires and fires the auditor. Scholars note that commercialization has gradually
institutionalized in the accounting sector due to deregulation (Barrett & Gendron, 2006). This leads to both reduced audit quality and independence (Suddaby et al., 2009). The increasing commercialism is a threat for the viability of the accounting sector (Gendron & Spira, 2010). All these developments hint at the importance of what defines auditors in carrying out their work. Is it upholding professional values or is it commercial interest? Or maybe both? These are
important questions, because according to Broberg et al. (2018) auditor’s identification with the audit firm is a core driver of commercialization. The audit firm identity of the auditor emphasizes financial gains, presuming that audit firms are profit oriented (Freidson, 2001). This indicates that auditors with a stronger audit firm identification may possess stronger commercial values and exhibit more commercial behaviour (Broberg et al., 2018). An auditor with a strong audit firm identification is expected to be more focused on solely the needs of their firm when attempting to partake to its employer’s success in a competitive environment. On top of that these auditors are more likely to respond to pressures from its employer (Broberg et al., 2013). This may have an impact on auditors’ commitment to independence (Barrainkua, & Espinosa-Pike, 2018).
The identity of an auditor is unlikely to be a uniform construct (Khalifa, 2013) and may consist of a combination of an auditor’s professional and audit firm identification. Indeed, Kotler & Connor (1977) argue that auditors should accomplish their professional duties instead of focusing on organizational needs. Other scholars also note that for many auditors their personal reputation of being competent, ethical and independent is an important part of who they are (Hodges & Young, 2009). Studies show that auditors with a strong professional identification value the public
interest, exhibit autonomy, professional judgement and independence (Suddaby et al., 2009). These auditors are less likely to engage in audit quality threatening behaviours to please clients instead of serving the public interest (Garcia-Falières & Herrbach, 2015).
Any individual auditor will experience a different combination of several identities (Empson, 2004). Regarding auditor’s professional and audit firm identity, it is already known that the corresponding values and beliefs can result in an identity conflict. Auditors may have to
compromise between ethical duties of the accounting profession through setting up objective, true and fair accounts and the constraints created by their audit firm through not losing sight of the financials gains. This is a dilemma since auditors are supposed to contribute to the moral and
ethical base of the business world (Garcia-Falières & Herrbach, 2015). This may have important implications for audit quality.
While the interest in audit quality is running for decades, there have been relatively few surveys of values and beliefs about audit quality and its determinants (Beattie et al., 2012). As a driver of increasing commercialization in the accounting sector (Broberg et al., 2018) and the
simultaneously increasing frustration of society about the delivered audit quality (Duff, 2009), it is interesting to research if audit firm identification impacts audit quality threatening behaviour. There is little research done on organizational aspects of audit quality such as audit firm
identification (Power, 1995). Behavioural accounting research has primarily been centred on organizational commitment (Hall et al., 2005). In addition, this research is of social importance. There are great doubts about the accounting sector to appropriate accomplish its society role (Sikka et al., 1998). The frequency of poor delivered audit quality is one of the two most common criticisms about auditors, besides that audit fees are too high (Knechel, 2016).
Hence this study will research the impact of audit firm identification on audit quality threatening behaviour at the level of the individual auditor. Moreover, the relationship between the
professional identification and audit quality threatening behaviour will be investigated and whether professional identification has a moderating effect on the impact of audit firm
identification on audit quality threatening behaviour. Auditors are namely more likely to engage in quality threatening behaviour when they strongly identify with their audit firm.
If the study shows a positive relation between audit firm identification and quality threatening behaviour, further studies should make clear how audit firm identification could be reduced. This reduction should preferably be at least in that respect, that an auditor does not pay allegiance to the audit firm when examining the client’s financial reports. It is after all impossible to destruct all incentives that are threatening auditor’s independence (Cooper & Neu, 2006). The goal of this study is not improving auditor’s independence, but reducing audit quality threatening behaviour to improve audit quality.
Successively the importance of audit quality and the related quality threatening behaviour will be discussed. Then the professional and audit firm identification will be explained. Consequently, it will be illustrated how the presence of both identities could result in an identity conflict in the
accounting sector. After the theoretical section, the methodology of the research is described and the results will be discussed.
THEORY
Importance of Audit Quality Threatening Behaviour
The acceptance of audit quality by society is essential for audit firm’s long-term continuance (Carpenter & Dirsmith, 1993). The external quality of audit services is defined to be the market-measured combined probability that an auditor will both discover and report an error in the client’s accounts (DeAngelo, 1981). According to Deis & Giroux (1992) this definition has two distinct elements: (1) auditor’s competence which relates to the auditor’s ability to discover material misstatements in the client’s financial statements, and (2) auditor’s professional
independence which relates to the auditor’s willingness to report discoveries of client’s material misstatements. Both elements are also positively related to audit quality (Knechel et al., 2013). Discovering a misstatement requires using effective and appropriate resources while reporting the misstatement requires taking appropriate actions, given the circumstances, at the end of the audit. Hence financial statements can mislead users through both accidentally and intentionally errors (Francis, 2004). To take both types of errors into account, auditors must perceive errors and consider whether to inform clients on these mistakes (Knechel et al., 2013). Francis (2004) argues that it occurs regularly that auditor’s fail to apply the generally accepted accounting principles (GAAP failure) or fail to bring out a modified or qualified audit report when, given the
circumstances, it is required (audit report failure). However, unlike many economic activities, the concept of audit quality lacks precise and objective standards. The audit report is the only evident output of audit quality. Thus, defining and measuring audit quality is a challenging task
(Warming-Rasmussen & Jensen, 1998). Moreover Knechel et al. (2013) argue that audit quality is uncertain, imperceptible and it is impossible to determine the residual risk of an audit. These are worrying features of audit quality since the accounting profession’s future mainly depends on its ability to verify and legitimize the importance of audit quality (Carpenter & Dirsmith, 1993). Grey (1998) therefore claims that auditors must hold their high level of perceived professionalism to safeguard society’s positive image of audit quality. This makes audit quality especially
sensitive to behaviours of individual performers of an audit (Herrbach, 2001). Therefore, audit behaviour, as relatively perceptible part of the construct of audit quality, is crucial to verify and
legitimize audit quality (Grey, 1998). Hence Herrbach (2001) claims that audit quality
threatening behaviour is an acceptable substitute for audit quality to determine the delivered audit quality by auditors. ‘Audit quality threatening behaviour can be defined 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 (Herrbach, 2001). Literature acknowledges that audit failure is inversely linked to audit quality: the higher the audit failure, the lower the audit quality (Francis, 2004; Sweeney et al., 2013). Beattie & Fearnley (1994) add that audit quality
threatening behaviour could damage the reputation of the accounting profession. Besides
possessing high professional standards, an effective cost control is needed secure the audit firm’s continuity in the increasing competitive audit market with decreasing audit fees. However
effective cost control is achieved by controlling the spent time and budget on a firm’s client which in turn is used to evaluate auditors’ performance. Otley & Pierce (1996) proved that the felt pressure by auditors to perform efficiently can result in justification of quality threatening behaviours. The Commission of Auditors’ Responsibilities (1978) stated that this is one of the most profound causes of audit failures. According to Pierce & Sweeney (2006) auditors hardly sense any consequences of quality threatening behaviours for themselves, their audit firm or accounting profession. Auditors believe it’s difficult to discover threatening behaviours, even if Grey (1998) claimed otherwise. On top of that auditors’ conscientiousness guarantees that quality threatening behaviours doesn’t take place in any significant area. Auditors’ confidence of low consequential effects influences their ethical reasoning. Hull et al. (1999) claim therefore a lack of ethical guidelines. The emphasized quantitative controls by audit firms (McNair, 1991; Willet & Page, 1996), such as time budgets, possibly conflicts with the upholding of appropriate quality standards that is emphasized by the accounting profession. The excessive quantitative controls are specifically threatening the accounting sector, because audit quality depends largely on judgement and integrity of individual auditors (Otley & Pierce, 1996; Svanström, 2015). Social Identity
Our values, beliefs and identities are strongly connected to the social group that we are part of and indicate the group’s behaviour (Tajfel & Turner, 1986). A great number of studies showed that social norms deeply influence our personal behaviour (Cialdini & Goldstein, 2004). Social identities provide instructions and directions that reduce uncertainty and deviation about
someone’s beliefs, values and behaviours (Hogg & Terry, 2000). Individuals classify themselves to understand their social environment (Ashforth & Mael, 1989), to provide themselves a feeling of belonging (Ashforth et al., 2008) and to improve their self-esteem (Warren & Alzola, 2009). When a social identity becomes more important and noticeable, individuals are more likely to adopt its behavioural norms (Hirsh & Kang, 2016). The social identity theory indicates that an individual’s identification with a group increases individual’s willingness to social influence from fellow group members and decreases individual’s willingness to social influence from non-group members (Turner et al., 1987). Therefore, the social identity theory supports this study. Bamber & Iyer (2002) argue that auditors are likely to possess dual social identities. The first identity is associated with the accounting profession and the second with the audit firm. The social identity theory can clarify both professional and organizational beliefs and values (Loi et al., 2004; Hogg, 2006). Moreover, it could help explain how professional identification affects the relation
between audit firm identification and quality threatening behaviour. According to Brewer & Gardner (1996) an auditor can simultaneously cherish professional identification as an
independent auditor and audit firm identification as a client friendly auditor. However, Hirsh & Kang (2016) claim that both identities are characterized by different references, motivations and demands and that identification with one group assigns important limitations on the span of personal behaviour that can be expressed in any circumstance. It becomes complicating when an auditor tries to balance its commitment to both identities. In case the professional beliefs and values are inharmonious with the audit firm’s beliefs and values, and their norms are equally salient in each circumstance, we speak of an identity conflict (Bamber & Iyer, 2002). It leads to unfamiliar circumstances with much ambiguity and creates tensions that must be harmonized by the audit firm in order to survive (Gelfand, 2012; Voisey, 2010). Barrett & Gendron (2006) claim that auditors are embracing commercialism, which is incompatible with auditors’ professional identification. Gaa (2006) agrees that only auditors without an identity conflict, indicating high professional identification and low audit firm identification, can provide a reasonable degree of certainty that financial statements don’t contain material misstatements. The identity conflict is a controversial issue in the accounting profession (Moore et al., 2006). Numerous studies have been done on several social identities, but these are commonly examined separately (Frable, 1997). Furthermore, its effects on individual level are rarely evaluated (Horton et al. 2013). First,
professional identification will be discussed because it precedes audit firm identification (Bamber & Iyer, 2002).
Professional Identification
Professional identification is the extent to which an individual identifies with his or her profession (Bamber & Iyer, 2002). Professional identification captures the extent to which an individual internalizes the professional norms, values and beliefs of the profession in which the individual is working (Mael & Ashforth, 1992). Professionalism in the accounting community refers to an idealized, coherent and organized set of values and beliefs focusing on serving the public interest and not practitioners financial self-interest (Gendron, 2002). An auditor who identifies with the accounting profession is commitment to and acceptance of the independency requirements and possesses ethical values (Freidson, 2001). Auditors that identify strongly with being an auditor are more likely to uphold the responsibility to act to professional norms, even if it requires a personal sacrifice (Arens, 2009). Audit research indicates that the professional values of an auditor are important for carrying out a high-quality audit (Supriyono, 1998). An auditor that upholds professional norms is free from influence of others, not dependent on others and unbiased in considering facts in formulating and expressing its opinion (Mulyadi, 2006). In fact, Mardijuwono & Subianto (2018) studied the relation between auditors’ professionalism and audit quality. They show that over and above auditor independence, auditors’ professionalism is
positively (and more strongly) related to audit quality. Auditors’ professional values and beliefs are arguably more closely related to auditors’ work activities than more formal interpretations of auditor independence. This is very much in line with research that highlights the importance of auditors’ professional scepticism (Grey, 1998; Suddaby et al., 2009; Garcia-Falières & Herrbach, 2015). Therefore, it is expected that auditors that strongly identify with being auditors are less likely to engage in audit quality threatening behaviour.
H1: Auditor’s identification with the audit profession is negatively related to audit quality threatening behaviour.
Audit Firm Identification
However, auditors often rather identify with their work on behalf of their audit firm instead of identifying with being auditors (Herda & Lavelle, 2013). Audit firm identification is the degree to
which an individual identifies with the audit firm (Pratt, 1998). Once an auditor starts working for an audit firm, the auditor adopts its rules and procedures, participates in audit-training programs and socialization processes and prepares audit work manuals as desired by their audit firm. These activities all strength auditor’s audit firm identity (Fogarty, 1994). The more audit firm
identification increases, the more the auditor will behave according to the firm’s beliefs, values and norms (Ashforth & Mael, 1989). Auditor’s with high audit firm identification instinctively make decisions based on the firm’s best interests and requests (Ouchi & Price, 1993; McGarry & Sweeney, 2007). These auditors are more concerned with the firm’s wealth and survival and therefore are more aware of the fee dependency, presuming that audit firms are profit oriented (Freidson, 2001). Therefore, they attach more value to improve the relationship with their clients (Svanberg & Öhman, 2015). Emphasizing financial gains, client relations and commercial activities reduces auditor’s independence (Powers et al., 2002; Suddaby et al., 2009). Broberg et al. (2018) proved that auditors with stronger audit firm identification are more commercially oriented. They are more involved in business and market-driving activities, customer-oriented activities and audit firm’s process activities. On top of that the commercialization of the accounting profession leads to de-professionalization, drives unethical behaviour and reduces auditor’s independence (Suddaby et al., 2009). Thus, commercial activities will also reduce audit quality, since audit quality is directly linked to auditor’s independence (DeAngelo, 1981). It is credible to hypothesize that audit firm identification has a negative association with audit quality.
H2: Auditor’s identification with the audit firm is positively related to audit quality threatening behaviour.
Moderating Effect of Professional Identification
Norris & Niebuhr (1984) argue that when professional and organizational beliefs and values are corresponding, these identities can strengthen each other. Auditors have a stronger audit firm identification when beliefs and values of the audit firm are harmonious with what is expected from professional perspective and vice versa. Evetts (2011) added that a strong organizational identification doesn’t suggest that auditors are disregarding professionalism, but that
organizational beliefs and values are always present in professional work and that professional beliefs and values are enforced ‘from above’.
Hekman et al. (2009) showed that professional identification is an important moderator of the extent to which employees identify with their organization. Therefore, professional and audit firm identification should be jointly investigated to analyse the relationship between audit firm
identification and quality threatening behaviour. Auditors’ social exchange with their audit firms mainly takes place through supervisors (Rousseau, 1995), which primarily promote efficiency and profitability at the expense of profession-defined audit quality (Freidson, 2001). According to the social identity theory, auditors with high audit firm identification are more receptive to social influence from supervisors because they can more strongly identify with supervisors (Turner et al., 1987). As discussed before, possessing high audit firm identification is expected to lead to more quality threatening behaviour. In opposition auditors possessing a high professional identity don’t regard supervisors as true members of the accounting profession. These auditors perceive supervisors as guardians of the audit firm that clearly emphasize organizational beliefs and values instead of what in their opinion should be professionalism (Golden et al., 2000). Consequently, supervisors aren’t considered as sensible source of behavioural guidance. Auditors’ with high professional identification are more likely to be less receptive to social influence from
supervisors and possibly even behave against it (Turner, 1991).
However generally speaking, auditors rather make decisions on the logic of commercialism to satisfy supervisors (Malsch & Gendron, 2013), but according to Bazerman et al. (2002) auditors with a strong professional identification appear to some extent to be immune to these biases. Although even trustworthy and precise auditors can unconsciously change numbers to a degree it becomes misleading (Bazerman et al., 2002). The career of an individual auditor can namely depend on a single client. Moreover, audit firms use audits as approach to build relationships with clients to sell more money-making consulting services. Hence an auditor’s drive to provide favourable audits runs deep, once an auditor equates its own interest to its audit firm. This leads to the hypothesis that professional identification weakens the positive relationship between audit firm identification and audit quality threatening behaviour.
H3: Auditor identification with audit profession moderates the relationship between auditor’s identification with the audit firm and audit quality threatening behaviour, such that auditors are most likely to engage in audit quality threatening behaviour when they strongly identify with the audit firm, but weakly identify with the audit profession.
RESEARCH METHODOLOGY
Sample
The data for the present study is gathered through a survey. Questionnaires were sent by e-mail to 135 Dutch auditors. These auditors were all employed at an audit firm and had at least two years of audit experience. Only auditors with more than two years of experience were included because entry-level auditors are still in the building stages of their work identity. Auditors were informed that their participation was voluntary and confidential. Participants were offered the possibility to receive a personal benchmark report in which their own scores were benchmarked against the scores of other auditors who have filled out the survey. Out of the 135 Dutch auditors that were personally contacted, 114 auditors completed the survey for a response of 84,4%. The auditors that were personally contacted and who participated in the survey also had the opportunity to invite fellow auditors for participation. This eventually led to a total sample of 131 auditors. After detecting and correcting outliers from the independent and dependent variables that fell outside the 99,7% confidence interval, the study’s remaining sample consisted of 129 auditors.
Measures
The instruments for all variables were measured on seven-point Likert scale. A 7-point scale is chosen, because research suggests that the reliability of measurement with answer scales is optimized with seven response categories (Colman et al., 1997). According to Miller (1956) the human mind has a span of absolute judgement that can distinguish about seven distinct
categories, a span of immediate memory for about seven items and a span of attention for about six objects at a time. This suggests that any increase in response categories beyond seven might be futile for the research.
Dependent Variable
Audit quality threatening behaviour. To measure the extent to which an individual auditor exhibits audit quality threatening behaviour, the instrument of Herrbach (2001) is used. Participants were asked to indicate how often they acted in the following quality threatening behaviours when carrying out an audit, varying from ‘never’ to ‘very often’: (1) ‘Reduction of work below what is considered reasonable.’ (2) ‘Superficial review of client document.’ (3) ‘Acceptance of weak client explanation.’ (4) ‘Failure to pursue a questionable item.’ (5) ‘Failure
to research an accounting principle.’ (6) ‘Signed of an audit programme step without completing the work.’ (7) ‘Greater than appropriate reliance on client work.’ (8) ‘Personally engaged in underreporting of time.’ The internal reliability according to Cronbach’s alpha is 0,767. Independent Variables
Professional identification. The measurement capturing the extent to which auditors identify with their profession is based on Bamber & Iyer (2002). Consistent with Russo (1998), the five items refer to professional orientation to measure professional identification. This led to the following five items, varying from ‘strongly disagree’ to ‘strongly agree: (1) ‘When someone criticizes the audit profession, it feels like a personal insult.’ (2) ‘I am very interested about what others think about the audit profession.’ (3) ‘When I talk about the audit profession I usually say ‘we’ rather than ‘they’. (4) ‘When someone praises the audit profession, it feels like a personal compliment.’ (5) ‘If a story in the media criticized the audit profession, I would feel
embarrassed.’ The Cronbach’s alpha is 0,806.
Audit firm identification. The extent to which auditors identify with their audit firm is likewise based on Bamber & Iyer (2002) and consistent with Russo (1998). However, in contrast with measuring professional identification, six items from Russo (1998) were used to measure audit firm identification. This included the following items, varying from ‘strongly disagree’ to ‘strongly agree’: (1) ‘When someone criticizes this audit firm, it feels like a personal insult.’ (2) ‘I am very interested about what others think about this audit firm.’ (3) ‘When I talk about this audit firm, I usually say ‘we’ rather than ‘they.’’ (4) ‘The audit firm’s successes are my
successes.’ (5) ‘When someone praises the audit firm, it feels like a personal compliment.’ (6) ‘If a story in the media criticized this audit firm, I would feel embarrassed.’ The Cronbach’s alpha is 0,861.
Control Variables
First, I control for turnover intention. Malone & Roberts (1996) find that auditors with intentions to leave their audit firms are more likely to engage in audit quality threatening behaviour,
because these auditors are less feared of the possibility of dismissal. Further they are less likely to be concerned with adverse impacts of threatening behaviour on performance evaluation and promotion. Turnover is measured with Dalton’s et al. (2015) three-item scale. An example item
included: ‘I often think about leaving the firm I work for’ (1= strongly disagree, 7= strongly agree). The Cronbach’s alpha is 0,862. Second, Persellin et al. (2014) demonstrated that higher workload results in decreased audit quality through reduced audit procedures, impaired audit judgement and challenging to contain auditors with sufficient knowledge and competence. Workload is measured with Spector & Steve’s (1998) five-item scale. An example item included: ‘How often does your job require you to work very fast’ (1= never, 7= very often)? The
Cronbach’s alpha is 0,811.
RESULTS
Descriptive and Correlation Analysis
The study’s sample included 93 men and 36 women. The participant was on average 31 years old, worked 46 hours a week and has been active for 7.5 years at his or her current audit firm. Table 1 presents the means, standard deviations, medians and Pearson correlations of all variables used in the study. Given a scale midpoint of 4 and maximum value of 7, quality threatening behaviour (QTB) is relatively low (mean = 2.39) while professional identification (mean = 4.32) and audit firm identification (mean = 4.86) are relatively high.
The Pearson correlations show that there isn’t a significant relation (-.136) between quality threatening behaviour and professional identification or (-.064) between quality threatening behaviour and audit firm identification. However, there is a strong significant positive relation (.714) between professional and audit firm identification. These results not only give the impression that it is possible to identify with both the accounting profession and audit firm without this leading to quality threatening behaviour, but also indicates that auditors who possess a strong professional identity are also likely to possess a strong audit firm identity.
Concerning the control variables, the workload among the participants is relatively high (mean = 5.04), but the participants are very divided regarding their turnover intention (mean = 3.66; S.D. = 1.47). However quality threatening behaviour correlates significantly (.203) with both turnover intention and (.218) with workload. The results suggest that both used control variables are well-chosen for this study.
Table 1: Means, standard deviations (S.D.), medians and Pearson correlations
Variables Mean S.D. Median 1. 2. 3. 4.
1. QTB 2.39 0.79 2.29
2. Professional identification 4.32 1.11 4.40 -.136
3. Audit firm identification 4.86 1.04 5.00 -.064 .714***
4. Turnover intention 3.66 1.47 3.67 .203** -.189** -.327***
5. Workload 5.04 0.85 5.20 .218** -.054 -.157* .331***
*p < .10 (2-tailed) **p < .05 (2-tailed) ***p < .01 (2-tailed) N=129
Regression Analysis
To test the hypotheses, a regression analysis is performed. The results are presented in table 2. Step 2 shows the association of professional and audit firm identification with quality threatening behaviour, in which the study controls for the variables turnover intention and workload. Step 3 includes the result of the standardized moderating variable, professional identification, on the relationship between the standardized independent variable, audit firm identification, and quality threatening behaviour.
Table 2: Regression analysis of the effect of an identity conflict on quality threatening behaviour
Quality Threatening Behaviour
Variables Step 1 Step 2 Step 3
B SE B SE B SE Control variables Turnover intention .079* (.049) .085** (.051) .075* (.051) Workload .157** (.084) .168** (.084) .162** (.084) Main variables Professional identification -.157** (.087) -.153** (.087) Audit firm identification .131* (.097) .110 (.098)
Two-way interaction
Professional identification x audit firm identification
-.094* (0.067)
R² .067 .091 .105
R² change .024** .014***
*p < .10 (1-tailed) **p < .05 (1-tailed) ***p < .01 (1-tailed) N=129
Step 2 shows that professional identification, B = -.157, p < .05, has a significant negative influence on quality threatening behaviour. The result proves that a stronger professional
identification will lead to less quality threatening behaviour. Therefore, the first hypothesis is supported.
In addition, step 2 shows that audit firm identification, B = .131, p < .10 has a marginal significant positive influence on quality threatening behaviour. It indicates that a stronger identification with the audit firm leads to more quality threatening behaviour. Even though the evidence is not as strong as for the first hypothesis, the evidence still supports the second hypothesis.
Step 3 shows there is also a marginal significant negative effect of professional identification, B = -.094, p < .10, on the relation between audit firm identification and audit quality threatening behaviour.
Figure 1: Moderating effect of professional identification on the relation between audit firm identification and
quality threatening behaviour
Figure 1 shows that auditors with high professional identification exhibit less quality threatening behaviour compared to auditors with a low professional identification, regardless of auditors’ degree of identification with their audit firm. The figure also clarifies that possessing a high professional identification moderates the existing positive relation between audit firm
identification and quality threatening behaviour. Therefore, the third hypothesis is supported.
1 1,5 2 2,5
Low Audit Firm Identification
High Audit Firm Identification Qu ality T h rea ten in g B eh av io u r (Me an ) Low Professional Identification High Professional Identification
Supplementary Analyses
Due to the marginal significant evidence concerning the second and third hypotheses, the results don’t provide a clear answer whether an audit with both a strong professional and audit firm identity exhibits significantly more audit quality threatening behaviour comparing to auditors with a strong professional and weak audit firm identification, as claimed by Gaa (2006).
Therefore, first a One-Way Anova is performed to study the effect of identification preference on quality threatening behaviour (QTB). The quality threatening behaviour of participants with a professional identification preference is compared to the quality threatening behaviour
participants with an audit firm identification preference.
Table 3: One-Way Anova based on identification preference
Identification preference QTB Mean (S.D.) Number of participants
≥ professional identification 2.238 (.840) 33 > audit firm identification 2.445 (.768) 96
¹ Participants who, based on their scores with both identities, identify equally or more with the profession respectively the audit firm, have a professional identification preference. Participants that identify more with the audit firm respectively the profession, have an audit firm identification preference.
² A marginal significant difference in quality threatening behaviour (QTB), p < .10, between both identification preferences was found.
The results in table 3 show that more respondents identify with the audit firm (96 respondents) than with the accounting profession (33 respondents), including the 7 respondents that identify equally with both. There is a marginal significant difference of identification preference on quality threatening behaviour, F (1,128) = 1.696, p < .10. Although marginally significant, it supports the first two hypotheses that professional identification is negatively associated with quality threatening behaviour and that audit firm identification has a positive influence on quality threatening behaviour.
Further two supplementary analyses were carried out to test the third hypothesis. First, another regression analysis is performed to study if a smaller identification difference leads to quality threatening behaviour. The difference between professional and audit firm identification of each participant is compared to the degree of quality threatening behaviour. A small identification difference indicates that the participant is suffering an identity conflict.
Table 4: Regression analysis of identification difference on quality threatening behaviour
Quality Threatening Behaviour
Variables Step 1 Step 2
B SE B SE Control variables Turnover intention .079* (.049) .090** (.049) Workload .157** (.084) .169** (.084) Main variable Identification difference -.148** (.084) R² .067 .090 R² change .023**
*p < .10 (1-tailed) **p < .05 (1-tailed) ***p < .01 (1-tailed) N=129
Step 2 in table 4 shows that the identification difference, B = -.148, p < .05 has a significant negative influence on quality threatening behaviour. The result indicates that the smaller the identification difference between professional and audit firm identification, the more quality threatening behaviour is exhibited by an auditor. Based on the regression analysis, hypothesis 3 would be supported.
Also, a Two-Way Anova is performed, since two independent variables, professional and audit firm identification, are compared with each other. Participants are divided into strong and weak identification within both groups, based on their scores with both identities, using the median split method. The method leads to 4 categorization groups. Table 5 shows the distribution of the 129 respondents respectively the median for both identities and consequently table 6 shows the categorization of the respondents among the four possible groups.
Table 5: Number of participants respectively the median
Professional identification Audit firm identification Score < median 61 57 Score ≥ median 68 72
¹ The median of professional identification and audit firm identification can be found in table 1.
Table 6: Two-Way Anova when participants are categorized Group Professional identification Audit firm identification QTB Mean (S.D.) Number of participants 1 Weak Weak 2.500 (.767) 48 2 Weak Strong 2.506 (.975) 13 3 Strong Weak 2.429 (.881) 9 4 Strong Strong 2.274 (.753) 59
¹ Participants are categorized based on their identity scores with both the profession and audit firm, using the median split method (table 5). Auditors below the median are categorized as ‘weak’ and auditors equally ore above the median are categorized as ‘strong’.
² No significant differences in quality threatening behaviour (QTB) were found compared to the total average of 2.392 (.789) (table 1).
Table 6 shows that the largest part of the respondents either identifies with both identities (group 4) or with neither of both identities (group 1). This is consistent with table 1 showing the
significant correlation between both identities. Further group 2, that identifies strongly with the audit firm and weakly with the accounting profession (mean = 2.506), exhibits on average the most in quality threatening behaviour. The result is consistent with the literature. However, remarkably is that group 3, that identifies strongly with the accounting profession and weakly with the audit firm (mean = 2.429), exhibits more quality threatening behaviour than group 4, that identifies strongly with both (mean = 2.274). Thus, group 4 is supposed to experience an identity conflict, which clearly is not the case. There is no significant interaction effect between
professional and audit firm identification on audit quality threatening behaviour, based on the Two-Way Anova, F (1,128) = 0.182, p > .10. Thus, hypothesis 3 would be rejected.
DISCUSSION
The paper examined the effects of professional identification and audit firm identification on audit quality threatening behaviour. Moreover, the study examined whether an identity conflict between the accounting profession and the audit firm leads to quality threatening behaviour. The results showed that quality threatening behaviour among the auditors is relatively low while the identification with both the accounting profession and audit firm is relatively high. Interestingly, most participants identify with either both or neither of both groups. Broberg et al. (2018) also found a strong significant positive correlation between professional and audit firm identification and indicated the development of ‘organizational professionalism’. Development involves the changing of professionalism into standardized procedures and hierarchical structures of authority
and decision-making as auditors increasingly work in large-scale organizations (Evetts, 2011). Despite that both identities are related, the regression analysis proved that the examined identities have clearly opposite effects on quality threatening behaviour. Professional identification has a significant negative effect on quality threatening behaviour, while there is a marginal significant positive relationship between audit firm identification and quality threatening behaviour. The supplementary performed One-Way Anova showed that auditors’ identification preference has a significant effect on the degree of exhibited quality threatening behaviour and hence confirmed the first two hypotheses. The results are in line with prior literature (Bamber & Iyer, 2002; Suddaby et al., 2009), suggesting that both identities have meaningfully separate constructs, despite that they are related. Audit firms succeed in reconciling different values through either selection practices or socialization practices (Suddaby et al., 2009). Further the regression analysis also showed there is a marginal significant negative effect of professional identification on the relationship between audit firm identification and quality threatening behaviour.
Nevertheless, the supplementary analyses showed opposite results regarding the third hypothesis, concerning whether an identity conflict leads to more quality threatening behaviour. The
regression analysis showed that a smaller identification difference between both identities leads to significantly more quality threatening behaviour. Noteworthy is that the Two-Way Anova showed that the significant result regarding small identification differences only applies for differences in which participants identify weakly with both identities. In other words, if
participants possess a strong bilateral identity, there isn’t significantly more quality threatening behaviour exhibited. Hence the Two-Way Anova test and the regression analysis regarding the third hypothesis both showed the importance of possessing a high professional identification to limit the degree of exhibited quality threatening behaviour. Auditors don’t experience an identity conflict in terms of quality threatening behaviour, because their professional identity on one hand directly limits quality threatening behaviour. On the other hand, auditors’ professional identity also has an indirect role, since it moderates the positive effect of audit firm identification on quality threatening behaviour. Therefore, the third hypothesis is not supported. In line with Evetts (2011), a strong audit firm identification doesn’t mean that auditors are disregarding
professionalism. More importantly, the study is also in accordance with Bazerman et al. (2002), suggesting that respondents’ professional identification moderates to some extent the effect of audit firm identification on quality threatening behaviour. Auditors can maintain two identities
and identify strongly with both the profession and audit firm without exhibiting more quality threatening behaviour than auditors without this strong bilateral identity. Regardless of the degree of audit firm identification, a strong professional identification is even an important prerequisite for delivering audit quality.
Implications and Future Research
Future audit research should focus more on stimulating auditors’ professional identification instead of discouraging audit firm identification. This suggestion is not only due to the proven moderating effect of professional identification on the positive relationship between audit firm identification and quality threatening behaviour. The results namely have shown that the negative effect of professional identification on quality threatening behaviour is stronger than the positive association of audit firm identification with quality threatening behaviour. It is therefore expected that future research into stimulating professional identification to increase audit quality is more effective than investigating ways to decrease audit firm identification. Sweeney & Summers (2002) recommend reducing the frequency of quality threatening behaviour through education. Audit firms must communicate professional standards to their employees and help them to obtain a professional certification. Charron & Lowe (2008) add that well-educated auditors are more likely to rely on their judgement and improve their professional scepticism. This directly leads to improved audit quality behaviour. Further this study showed that when an auditor identifies weakly with both the profession and audit firm, more quality threatening behaviour is exhibited compared to auditors who possess a strong bilateral identity. An intriguing follow-up study would be investigating whether possessing a strong bilateral identity contributes to job
satisfaction. Norris & Niebuhr (1984) argue that most auditors make little distinction between their professional commitment, organizational commitment and job satisfaction. Moreover Fogarty et al. (2000) claim that role stressors, especially role ambiguity and role conflict, influences job burnout. Subsequently Al Shbail et al. (2018) found that job burnouts reduce job satisfaction and that dissatisfied auditors are more likely to exhibit quality threatening behaviour. It is thus plausible that audit firms, which employ professionals and provide the proper
environment, are more likely to have employed auditors with a strong audit firm commitment and job satisfaction. A longitudinal study instead of an ad hoc design would be needed to investigate the causal relationship of professional and audit firm identification with job satisfaction.
Limitations and Strengths
First, this study is dependent on self-reported responses. Therefore, measures such as anonymity, confidentiality and direct mailing of responses were taken to minimize the likelihood of social desirability bias occurring. Despite, Otley & Pierce (1995) noted that the possibility of social desirability bias can never be completely ruled out when collecting sensitive data such as the degree of exhibited quality threatening behaviour. Some respondents are unwilling to disclose their actual quality threatening behaviour to protect the reputation of their audit firm or
accounting profession and hence also indirectly to protect their own reputation. However, if all respondents were completely honest of their level of quality threatening behaviour, it is expected that the results of this study would be even more significant than they already are. Most
respondents namely identified most strongly with their audit firm (table 3). It is already proven that audit firm identification has a marginal positive significant effect on quality threatening behaviour and this group of respondents were most likely to conceal their actual degree of quality threatening behaviour to protect their audit firm. Further the respondents mainly work for a Big 4 firms. Unlike non-Big 4 auditors, Big 4 auditors work for firms where the audit firm identity dominates (Evetts, 2011). Commercial orientation is rooted in their culture and reinforced by strong indoctrination and hierarchical structures (Broberg et al. 2013; Kosmala & Herrbach, 2006). However, this indicates that there is a greater difference between professional and audit firm identification in case responses of non-Big 4 auditors would be analysed and consequently more significant results. Moreover Suddaby et al. (2009) claim that partners have a stronger audit firm identification than other auditors. The respondents of this study where mainly seniors. Likewise, the previous discussed aspect, this indicates that there is greater difference between professional and audit firm identification for partners leading than for other auditors, leading to more significant results. Another made generalization of this study are the cultural circumstances. Despite that the Big 4 audit firms are multinational companies with international standards, the used results from only Dutch auditors could involve cultural and professional vagueness, particularly for what Dutch auditors understand by non-professional behaviour. Only an international performed study could solve this issue. Finally, an important strength should be mentioned. Even after three additional control variables were included, that could influence quality threatening behaviour, no significant differences were found. The nonsignificant control
variables that were added and removed, because they were not significantly related to quality threatening behaviour, were gender, age and tenure.
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