Abstract
Scholarly audit research demonstrates that the level of auditors’ professional skepticism is an important determinant of audit quality. However, much is still unknown about what exactly drives auditors’ professional skepticism in day-to-day life. Although the majority of research on auditor professional skepticism has studied auditor professional skepticism “as a trait” (i.e. as a fixed attribute that auditors have or do not have), recent scholarly work acknowledges the importance of auditors’ professional skepticism “as a state” (i.e. auditors may exhibit different levels of professional skepticism in different situations). In this study I focus on how auditors’ seniority impacts auditors’ professional skepticism and how an auditor’s identification with a client moderates that impact. In so doing, I highlight that an auditor may exhibit professional skepticism can differ across clients. Using survey data of 163 Dutch auditors, I find that seniority has a positive effect on professional skepticism, and that client identification lowers this positive effect of seniority. From these results it can be concluded that there are still some opportunities for senior auditors to improve their level of professional skepticism.
Will seniority of
auditors help to
remain skeptical while
working for clients?
Master Thesis, MSc A&C Accountancy
Name:
Student number: Supervisor: Date:
Word count:
Kas van den Broek S2659077
Dennis Veltrop 18-6-2020 7408
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1. Introduction
In the past there have been several financial scandals, like Enron, in which the auditor had a negative role (Chersan, 2019). While auditors must serve the public interest, they failed in many fraud cases and this resulted in the loss of public confidence (Albrecht et al., 2015). To restore the public confidence the regulations and procedures for auditors are often reshaped and changed (Toms, 2019). These reformations must lead towards less material misstatements in the financial annual report, which means higher audit quality (Nolder & Kadous, 2018). Higher audit quality must restore public confidence in the work of auditors (Albrecht et al., 2015). Only regulation will not guarantee audit quality, but multiple other elements also influence the quality of an audit (Chersan, 2019).
Both auditors and investors mentioned in a survey that individual auditor characteristics are some of the strongest determinants of audit quality (Christensen et al., 2016). Individual auditors need to carry out high-quality audit work because financial statement users must rely on their audit opinion. One essential auditor characteristic to perform high-quality audits is professional skepticism (hereafter skepticism) (Chersan, 2019). This is emphasized by the International Code of Ethics for Professional Accountants, which stated that the public may expect that auditors exercise skepticism during their work (Jules & Erskine, 2018). In addition, in the literature skepticism is also seen as crucial for high audit quality. Skepticism will positively influence the judgment process of the auditor, which will lead to higher audit quality (Knechel et al., 2013).
While skepticism is important for audit quality, the level of skepticism of auditors is not at an appropriate level (IESBA, 2018). For a better understanding of this problem, Hurtt (2010) identified a crucial difference between trait- and state skepticism. Trait skepticism is the constant level of skepticism of an auditor which is relatively stable over time, whereas state skepticism is the temporary condition that is influenced by situational factors. This means that an individual auditor may have diverging levels of skepticism depending on for what client an auditor is working for and is based on situational factors. The three dimensions which are most influenced by situational factors are: search for knowledge (SK), questioning mind (QM), and the suspension of judgment (SJ) (Robinson et al., 2018).State skepticism has a great impact on the skeptical behavior of the auditor. While auditors could improve their skeptical behavior, an
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auditor cannot become completely unbiased in his work (Guiral et al., 2015). The unconscious effect of bias is influenced by pressures from giving a preferred conclusion on the one hand and making an accurate evaluation on the other hand. It is important to understand why some auditors are more skeptical than others, but the multiple factors which influence the skeptical characteristics of auditors makes it hard to find out (Guiral et al., 2015).
Previous literature has identified that seniority of auditors has different effects on state skepticism (Nelson, 2009; Hurtt, 2013). Specifically, senior auditors have had more education and training which results in deep knowledge structures (Guiral, 2015). The deep knowledge structure helps to deal with extensive information and results in making more accurate decisions. Further, seniority leads to a greater understanding of the client’s business and industry, which will help to make better conclusions on the client’s assertions (Hammersley, 2006). Besides, senior auditors have experienced many different situations where skeptical behavior was required and can use this experience for new situations (Hammersley, 2006). Training, education, expertise, and experience will help to deal with situational factors and improve the level of state skepticism. However, some other researchers found negative effects of seniority on skepticism. The main reason is that senior auditors are relying too much on their knowledge and past experiences, without questioning their judgment process enough (Grenier, 2017). Thus, whereas some research has highlighted the positive effect of seniority on professional skepticism, other studies show a negative effect. The critical question is formulated under what circumstances does auditor's seniority help or hurt state skepticism.
A situational factor that will influence the exercise of state skepticism is the relation with the client (Bamber & Iyer, 2007). During an audit, auditors work with and for a client and start to build up a relationship with the client. Based on the social identity theory, the relationship can result in identification with the client (Mael & Ashforth, 1992). The identification with the client could lead to less objectivity and independence towards the findings, which results in a lower level of state skepticism (Bamber & Iyer, 2007). Senior auditors have mostly a longer relationship with a client and more knowledge about the client’s business and systems. This will result in high-client identification of senior auditors and will lower the skeptical behavior because they will rely too much on their knowledge about the client and questioning the client’s assumptions not enough. In the end it seems that the improved relationship with the client of senior auditors will affect the independence and objectivity of the auditor, and therefore results in a lower level of state skepticism.
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The aim of this study is to understand how auditors’ characteristics have an influence on state skepticism, and how to acquire an appropriate skeptical behavior. Seniority includes multiple characteristics that are developed over time and, therefore, have an influence on state skepticism. While many researches are not in line with each other about the main effect of seniority on state skepticism, this study will provide some more clarity. Client identification will also influence the exercise of state skepticism. Client identification will have different effects between auditors on state skepticism. Although senior auditors are better educated to remain skeptical, this study shows that client identification negatively influences the positive relation between seniority and state skepticism. This is an important finding to understand how to change auditors’ behavior to improve the level of skepticism. To test the relations explained above a survey among 201 auditors from Big-four and Non-Big-four companies was taken. The participants had at least two years of work experience, to guarantee that they had enough knowledge about the accountancy profession. The following research question is used for this research: Does the seniority of auditors positively relate to state professional skepticism?
The setup of the paper is as follows. In the following chapter the theoretical framework and hypotheses are presented. In the third and fourth chapter the research methodology and results are discussed, respectively. The final chapter provides the discussion and conclusion of the research.
2. Theoretical framework
2.1 Professional skepticism
To underline the importance of skepticism, the International Standards of Auditing (2010) contains the following definition of skepticism: “an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence” (p. 77). Skepticism will increase the focus and response towards the areas of increased risk, which will result in a lower chance of misstatements and higher audit quality (Nolder & Kadous, 2018). As shown by Knechel et al. (2013, p. 391 - 392) high skeptical auditors “are more likely to confront a client or perform additional procedures
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when high-risk irregularities arise (Shaub & Lawrence 1996), are more likely to detect fraud (Bernardi 1994), exhibit high-quality assessments of evidence (Hurtt et al. 2008), and are less trusting of a client and more likely to invest in high-levels of audit effort (Bowlin et al. 2012)”. Skepticism will have a positive effect on the judgment process of the auditor, which will lead in most cases to a better outcome of the audit (Knechel et al., 2013).
Skepticism is a multi-dimensional individual characteristic and determines the skeptical behavior of an auditor (Robinson et al., 2018). High-skeptical auditors are neutral towards assertions and try to find sufficient support for explanations over others (Hurtt, 2010). Skeptical action shows the behavior of the auditor, and skeptical judgment is a necessary condition for the action (Nelson, 2009). The skeptical judgment and actions can be influenced by personal-, task-, and situational factors. To understand how these factors influence skepticism, Hurtt (2010) made a distinction between trait- and state skepticism. Trait skepticism means the stable, enduring level of skepticism over time. Traits influence the attitudes and behaviors of auditors (Robinson et al., 2018). State skepticism is influenced by situational factors and is a temporary condition of the auditor (Hurtt, 2010). This means that for every engagement the level of skepticism could be different, based on the state of the auditor.
In this study the focus is on state skepticism and the term ‘skepticism’ will be used in this study to refer to state skepticism. Situational factors have an important role in the mindset of the auditor and therefore will influence the auditor’s skeptical behavior (Hurtt, 2010). Questioning mind (QM), suspension of judgment (SJ), and search for knowledge (SK) are the three individual characteristic dimensions that will be influenced most by situational factors (Robinson et al., 2018). QM is important to question the obtained information and evidence if it is indicative of a material misstatement; SJ is about withholding judgment until there is an appropriate level of evidence on which to base a conclusion; SK is about curiosity to understand the true state of a condition which goes beyond the verification of assertions. Situational factors that could influence these dimensions are for example: incentives, time pressure, or client relationships, but also situations that require a higher risk of material misstatement (Robinson et al., 2018). Skepticism is important to increase the skeptical behavior in the short-term and to determine what level of skepticism may be required for a particular engagement (Robinson et al., 2018). The reason is that an auditor who has a high-level of skepticism will be less influenced by situational factors and have an improved skeptical behavior. In Figure 1 the conceptual model of this study is shown.
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2.2 Seniority of the auditor
Seniority means the rank of an individual in a company according to accumulated experience (Disney & Gospel, 1989). An accountancy firm plays an important role in this process because they invest in their employees to improve the productivity and quality of their work (Flabbi & Ichino, 2001). The accumulated experience is acquired through training, education, expertise, and experience, as will be explained next. Education and training are important to develop deep knowledge structures (Guiral, 2015), and to develop auditor’s characteristics (Christensen et al., 2016). Deep knowledge structures help to deal with extensive information and result in making more accurate decisions. More accurate decisions will improve the overall quality of work and improve the search for knowledge. Furthermore, education and training influence the expertise and independence of the auditor (Christensen et al., 2016), as well as the auditor’s skeptical behavior (Glover & Prawitt, 2014). Besides training and education auditors also learn during their work from general-, market-, and job-specific experiences (Topel, 1991). Especially job-specific experiences will give an auditor more specialization and value which is an important part of seniority. Expertise and work experiences will also improve the search for knowledge.
As mentioned earlier, seniority has an influence on the auditor’s characteristics and therefore on skeptical behavior. Senior auditors have a better understanding of the client’s business and industry, and therefore are better able to interpret incomplete patterns suggestive of misstatement (Hammersley, 2006). The response to these incomplete patterns is to increase the assessed risk of misstatement and have a more questioning mind. When the quality of the assessment of evidence increases, the level of skepticism will also increase (Knechel, 2013). Furthermore, prior experiences with misstatements and fraud are useful for judgments of intentional misstatements in the present (Hurtt et al., 2013). While senior auditors probably have seen more cases of misstatement and fraud, they are better able to be skeptical towards new findings. Senior auditors will suspend their judgment and questioning the results even more. In addition, more senior auditors have also followed more education and training which have a positive effect on skepticism (Fatmawati et al., 2018). It trains the auditor’s capacity and judgmental abilities during the audit process, and gives more theoretical knowledge about audit-related topics and improve the search for knowledge characteristic. Especially the judgmental abilities are important for skepticism, to understand the situational factors which could play a
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role in each situation. Based on the previous positive relations between seniority and skepticism the following hypothesis is expected:
Hypothesis 1a: Seniority will lead to a higher-level of skepticism.
Seniority seems positively related to skepticism, however, junior auditors are gathering more audit evidence and therefore are in the best position to discover potential accounting breaches (Kadous, 2019). This is disadvantageous because junior auditors are not always raising all breaches, especially if meeting time budget has high priority, and therefore normally exercise a lower level of skepticism.
Besides the positive relation between seniority and skepticism, some studies found that senior auditors are less skeptical. Senior auditors could rely too much on their industry-based knowledge and are not questioning their own judgment process enough (Grenier, 2017). While this will result in a less questioning mind and skeptical behavior, the outcome of their decisions is mostly still correct. This is because their knowledge is usually correct that a non-misstatement explains the fluctuations in the financial statements. Although their knowledge is right in most cases, it is important to remain skeptical in all cases to guarantee the audit quality (Grenier, 2017). Payne & Ramsey (2005) found evidence that senior auditors are less skeptical than junior auditors in particular situations. Their reason for this is that only a few auditors have had a fraud-experience in their career, and therefore become less skeptical during their career. This means that the questioning mind and search for knowledge of senior auditors could become less if they have experienced less fraud in their career. For senior auditors to remain skeptical it is important to not rely solely on previous experiences, but to remain skeptical during every audit decision they make (Popova, 2013). Based on these studies the following hypothesis is tested to investigate if there could be a negative effect of seniority on skepticism:
Hypothesis 1b: Seniority has a negative effect on skepticism.
2.3 Client identification
A high-level of skepticism is important because an auditor will be less influenced by situational factors and increase the overall skeptical behavior (Robinson et al., 2018). One situational factor
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for auditors is to deal with the client relationship. These client relationships are built by interaction with the clients and their systems to gain more knowledge about them, but also to be able to work with and for them (Knechel, 2016). The client relationship can have a positive and negative effect on skepticism (Popova, 2013). On one hand, it leads to trust in the client and makes the audit more efficient. On the other hand, client relationships could have an impact on the independence and skeptical attitude throughout the audit and the audit will become less effective. Due to the client relationship the auditor starts to identify with the client which influences the auditor’s judgment (Bamber & Iyer, 2007). Although direct interaction with clients is a major part of every auditors’ work, the adoption of a particular identity differs between individuals (Lembke & Wilson, 1998). Client identification is a specific form of social identification and is explained by the social identity theory (Mael & Ashforth, 1992).
The social identity theory focuses on how social context affects intergroup relations (Hornsey, 2008). Because of internal criteria people identify themselves to a group, for instance based on gender or ethnicity (Tajfel, 1982). Identifying with groups leads for each particular individual to ‘ingroups’ and ‘outgroups’. Group forming shifts people’s minds in how they see themselves and each other (Hornsey, 2008). The intergroup self-concept comprises one’s ‘social identity’; a person identifies with the social categories to which he or she belongs, including the emotional and evaluative consequences which are part of the group. Even the personal and social positions and the role relationships auditors hold in a specific social context are important how they are represented (van Knippenberg et al., 2004). This means that one auditor could identify more with the client than another auditor. The social identity theory explains that people within ‘the same group’ are less competitive and are more willing to help each other, compared to people from the ‘outgroups’ (Tajfel, 1982). The degree of identification has consequences for both the attitudes and behaviors of the auditor towards the client (Ashforth & Mael, 1989).
Based on the social identity theory, the work for and with the client could lead to a situation where the auditor starts to identify with the client (Bamber & Iyer, 2017). This could result in reduced audit quality and a lower level of skepticism (Svanberg & Öhman, 2015). Identifying with the client could lead towards too much trust, and the auditor starts to rely too much on the management’s assertions (Harding et al., 2016). In this case more distrust and, therefore, an appropriate exercise of skepticism, is required to encourage a greater questioning mind and critical assessment of the evidence. Too much trust would result in auditors who are more inclined to acquiesce with the client and will lose some independence and objectivity towards
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the client (Bamber & Iyer, 2007). This happens because the auditor feels personally attached to the client. Because client identification is a situational factor and will lead to less objectivity and independency the following hypothesis is expected:
Hypothesis 2a: Client identification is negatively associated with skepticism.
While client identification could lower the objectivity and independence of the auditor (Bamber & Iyer, 2007), it does not mean that client identification automatically results in client commitment (Herda & Lavelle, 2015). A strong relationship with the client leads to less retaliation fear, because there are both-ways respect and dignity for each other and they care about each other’s wellbeing. This means that an auditor may be more willing to stand up to the client (Herda & Lavelle, 2013). Furthermore, where in most cases client identification results in more acquiescing by the auditor (Bamber & Iyer, 2007), it seems that seniority helps to lower this effect. The reason for this is that auditors with a deeper understanding of the client’s business are better able to see through persuasion attempts of the client (Hurtt et al., 2013; Brewster, 2012). A reason is that seniority could increase the self-esteem of an auditor and, therefore, are harder to be persuaded by the client (Agarwalla et al., 2017). Thus, at high-levels of client identification the senior auditors will be less skeptical because they are less likely to question issues enough and will rely too much on their own views. When the senior auditors have low-levels of client identification they are better able to remain skeptical because senior auditors are better developed to perform appropriate skeptical behavior and will be less hampered by the client’s persuasive actions. Therefore, the following hypothesis is expected:
Hypothesis 2b: Client identification will moderate the relation between seniority and skepticism, such that there is a negatively relationship at high-levels of client identification and a positively relationship at low-levels of client identification.
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3. Methodology
3.1 Data collection
For this research empirical data was collected by a survey to investigate the effects of seniority and client identification in a natural environment. The participants of the survey were Dutch-speaking auditors, who were approached via a professional network of six master students from the University of Groningen. In total 201 auditors initially agreed to participate in the survey. Most participants worked for the Big-four, but also auditors of smaller accounting firms are included. All participants had at least two years of work experience, so they had enough knowledge and experience of the audit profession and to the research topics. The research coordinator sent by e-mail the survey, followed up with two reminders. During all communication the auditors were given the possibility to opt-out and do not receive any future reminders. Before filling in the survey the participants were explained the ethical policies of the university and were assured that their responses would be confidential and used for research purposes only. The response rate of the survey was 88%. Out of the respondents 170 surveys were usable for this study. After preparing the dataset it was found that two respondents filled in a fictive value for client tenure (100 and 120 years) and five other respondents did not fill in the survey completely. Therefore, 163 surveys were used in this study. In Table 1 the descriptive statistics of the participants are shown.
Seniority
Client identification
State skepticism
Client Identification
State Skepticism
Seniority
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3.2 Measures
3.2.1 Dependent variable
State skepticism is about the skeptical behavior of the auditor which is influenced by situational factors. To measure skepticism a scale from Robinson et al. (2018) was adapted, which is based on the trait skepticism scale of Hurtt (2010). As mentioned before, the skepticism scale can be separated into three dimensions: QM, SJ, and SK. Some questions were modified to match with our context, as recommended by Robinson et al. (2018). The auditors had to answer twelve questions with one specific client in mind for whom they did an audit last period. The auditors had to choose one client, so the review experiences would be more memorable and are more likely to change or create behaviors (Flanagan, 1954; Mignonac & Herrbach, 2004; Morgeson, Mitchell, & Liu, 2015; Salterio & Gondowijoyo, 2017; Andiola & Bedard, 2018). It was important that they could mention what their experiences were during the audit and that the audit was finished. The reason for this is that the questions are made in the context of the period in which the state arose, consistent with Robinson et al. (2018). The participants had to indicate on a seven-item scale ranging from (1) strongly disagree to (7) strongly agree. See the Appendix for the survey questions. The Cronbach’s alpha is 0.82 and therefore reliable.
3.2.2 Independent variable
Seniority is the auditor’s rank within the organization based on their acquired experience and knowledge throughout the years. The variable is based on how the participant describes their level of seniority. The auditors had the choice between (1) starter towards (6) partner. The average of seniority is 3.91 and the standard deviation equals 1.20.
3.2.3 Moderating variable
Client identification is measured with the organizational identification scale of Mael & Ashforth (1992). Consistent with Bamber & Iyer (2002) and Russo (1998) the organizational identification scale is rephrased to measure client identification of auditors. While answering the questions the participant had to keep in mind the same client as for skepticism. Furthermore, instead of using a five-item scale for the six statements a seven-item scale was used to measure client identification ranging from (1) strongly disagree to (7) strongly agree. A seven-item scale was used for consistency between the different sections in the survey. The Cronbach’s alpha is 0.82.
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The first effect for which was controlled is that the gender of the auditor can influence the ethical decision-making (Craft, 2013). To limit that the results are influenced by gender differences a gender dummy variable was assessed for representing whether the auditor is female or not. The second control variable is a four dummy. The reason for using the Big-four dummy is twofold. First of all, the audit quality may differ between Big-Big-four and Non-Big-four firms (Sundgren & Svanstrom, 2014). Secondly, in general the importance of one client is less for Big-four auditors compared to smaller accountancy firms (Francis, 2004). The more clients a firm or auditor has the less important one particular client will be, because the loss of that client will not outweigh the loss of reputation (DeAngelo, 1981). The last two control variables are for client identification. Each client has another importance for the auditor and this can influence the way an auditor identifies with the client (Bamber & Iyer, 2007). The two control variables were measured in years of work for the client and the number of hours worked in the past engagement for the client. Both these control variables were not normally distributed, and therefore the variables are log-transformed.
3.3 Data analyses
To test the hypotheses a multiple regression analysis was performed using ‘IBM SPSS Statistics 26’. Before starting with the multiple regression analysis, a reliability analysis was conducted with the Cronbach’s alpha to guarantee internal consistency between the items. After performing this analysis, the mean variables for skepticism and client identification were made. In addition, a correlation analysis was used to test if the variables are related to each other. The measurement scales were taken from previous research, and therefore there was no reason to perform additional factor analyses. In order to test the moderated effect of client identification the independent variables were standardized.
4. Results
The aim of this study is to investigate if the seniority of auditors is positively related to state professional skepticism, and what effect client identification has on this relation. From the questionnaires the answers were analyzed and Table 1 shows the means, standard deviations, and Pearson zero-order correlations between the variables. The first striking observation is that
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the Big-four dummy is significantly correlated with five out of six variables. The positive correlation with skepticism is explainable because the audit quality of Big-four firms is in general higher (Francis, 2004). In addition, Big-four auditors spend more hours on the client and more women are working for Big-four firms. The Big-four dummy is negatively correlated to seniority which could indicate that auditors of Big-four companies switch more often to other jobs than Non-Big-four auditors. Lastly, in general for Big-four auditors a particular client is less important (DeAngelo, 1981), therefore, they identify less with a client in these results. Other observations were that both the female dummy and client hours are negatively correlated with seniority. This implies that there are still fewer women in senior positions and that more senior auditors spent less hours on a client. The last significant correlation is between client hours and skepticism, which may implicate that the more hours are spent on a client the more skeptical they are for that client. In this study 28% of the respondents are women and 83% of the respondents work for a Big-four firm. The average total years worked for the client is 2.97 years and worked 270.85 hours during the last engagement for the same client.
Table 2 shows the results of the linear regression analyses used to test the hypotheses. In total four models are used to test the hypotheses with state skepticism as the dependent variable. In Model 1 the control variables were included, in Model 2 the control variables and seniority and in Model 3 also client identification was added. In the last model, Model 4, the interaction term between seniority and client identification (moderator effect) was added next to the control variables and the main effects seniority and client identification.
Table 1. Means, Standard Deviations and Correlations Used Variables
Variables M SD 1 2 3 4 5 6 7 1. State skepticism 4.93 0.71 - 2. Seniority 3.91 1.20 .09 - 3. Client identification 2.60 1.05 -.11 .04 - 4. Female dummy 0.28 0.45 .05 -.17* -.10 - 5. Big-four dummy 0.83 0.38 .34** -.23** -.18* .17* -
6. Client tenure (years) 2.97 1.72 -.04 -.04 -.03 -.06 -.12 -
7. Client hours 270.85 270.57 .23** -.39** -.04 .10 .59** -.06 - Notes: M and SD of client tenure and client hours are based on the raw scores, whereas the correlations are based on the log-transformed variables.
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Table 2. Linear Regression Analyses Results for The Hypotheses for State Skepticism
Variables Model 1 Model 2 Model 3 Model 4
Constant 4.27** 3.91** 3.92** 3.90** (.32) (.34) (.34) (.34) Control variables Female dummy -0.02 0.03 0.03 0.02 (.12) (.12) (.12) (.12) Big-four dummy 0.59** 0.58** 0.56** 0.44* (.18) (.17) (.18) (.18) Client tenure 0.00 0.02 0.02 0.02 (.09) (.09) (.09) (.09) Client hours 0.03 0.10 0.10 0.13† (.07) (.07) (.07) (.07) Main effects Seniority 0.15** 0.15** 0.15** (.06) (.06) (.06) Client identification -0.04 -0.06 (.05) (.06) Moderator effect
Seniority x Client identification -0.12*
(.06)
R² 0.12 0.15 0.16 0.18
ΔR² 0.12** 0.04** 0.00 0.02*
Notes: Both seniority and client identification variables are standardized. Standard errors are shown in parentheses.
N=163. †p < 0.1, *p < 0.05, **p < 0.01
Support was found for hypothesis 1a that seniority leads to a higher level of skepticism, and therefore hypothesis 1b is rejected; seniority is not negatively related to skepticism. This is shown in Model 2 where the coefficient is positive and significant (b = 0.15, p < .01). In addition, the introduction of seniority in the model resulted in a statistically significant change in the R-squared of .04 (p < .01), providing support for hypothesis 1a. Hypothesis 2a is about the direct relation between client identification and skepticism. Model 3 indicates that there is a no-significant negative relation (b = -.04), and therefore client identification does not appear to be negatively associated with skepticism. A possible reason could be that the participants had less client identification (M = 2.60) than expected. In the last model the moderator effect of hypothesis 2b is supported by the result of the interaction term between seniority and client identification (Model 4, b = -0.12, p < .05). The negative moderation means that when senior auditors have high-levels of client identification they will be less skeptical, and when they have
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low-levels of client identification they will be more skeptical. Figure 2 shows a visual representation of the slopes of the moderator effects and it is clear that client identification reduces the positive effect of seniority on skepticism.
4.1 Robustness check
In this section two robustness checks were performed for both the hypotheses 1b and 2b. These robustness checks were performed to check if the results change with different model specifications. The first robustness check is for hypothesis 1b to investigate if there is not still a negative relation between seniority and skepticism. The analysis applied can be used to determine if seniority will negatively influence one of the three dimensions of skepticism. In line with Robinson et al. (2018), the three dimensions are questioning mind (QM), suspension of judgment (SJ), and search for knowledge (SK) with, respectively, Cronbach’s alphas of 0.88, 0.63, and 0.82. Although, the Cronbach’s alpha of SJ is not very high, it is above the very minimum of .60 and therefore it was used for the analysis. For each dimension a mean variable was made and three multiple regressions were performed that included all the four control variables, seniority as the independent variable and each dimension as the dependent variable (Table 3). Seniority has a significant positive relation with SJ (b = 0.22, p < .01) and SK (b = 0.10, p < .10). For QM no significant relation was found, and therefore hypothesis 1b is rejected. This additional analysis indicates that suspension of judgment is the underlying driver for the positive relationship between seniority and skepticism.
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The second robustness check was performed to investigate if the relationship of hypothesis 2b was mainly driven by seniority, or that other factors had an influence on the outcome. The reason is that seniority is a broad definition and could be interpreted differently among people. To perform this check, the years that an auditor works for the current accountancy firm were used as a proxy for seniority. The reason is that seniority is based on accumulated experience (Disney & Gospel, 1989). The accountancy firm will mainly invest only in the good employees to improve the productivity and quality of their work for the future (Flabbi & Ichino, 2001). Therefore, tenure of the auditor with the accountancy firm could be used as a proxy for seniority; working long for the firm means that they are satisfied with you and you could grow further and become more senior.
Tenure is measured based on how long someone works for their current accountancy firm. The variable was not normally distributed and, therefore, the natural logarithm of the variable was used. For this check the same steps were followed as the initial multiple regression analysis as performed for Table 1. Table 4 shows the results of the new moderator effect. The results show that tenure has, similar to seniority, a significant positive effect on skepticism (Model 2, b = 0.13, p < .05). However, Model 4 shows no significant relation for the moderator effect between
Table 3. Linear Regression Results for The Relation Between Seniority and The Different Dimensions of State Skepticism
QM SJ SK
Variables Model 1 Model 2 Model 1 Model 2 Model 1 Model 2
Constant 2.77** 2.65* 5.07** 3.61** 4.40** 3.74** (.60) (.86) (.36) (.20) (.38) (.54) Control variables Female dummy -0.18 -0.17 0.12 0.20 -0.07 -0.03 (.23) (.23) (.14) (.13) (.14) (.14) Big-four dummy 0.88** 0.88** 0.39* 0.38* 0.62** 0.61** (.33) (.33) (.20) (.19) (.21) (.21) Client tenure -0.12 -0.12 0.03 0.06 0.06 0.07 (.17) (.17) (.10) (.10) (.11) (.11) Client hours 0.15 0.16 -0.07 0.04 0.08 0.13 (.13) (.14) (.08) (.08) (.08) (.09) Main effect Seniority 0.02 0.22** 0.10† (.09) (.05) (.06) R² 0.11 0.11 0.03 0.13 0.11 0.12 ΔR² 0.00 0.10** 0.02†
Notes: Standard errors are shown in parentheses. N=163. †p < 0.1, *p < 0.05, **p < 0.01
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tenure and client identification (b = -0.03). The conclusion is that in the variable of seniority another factor is included than audit firm tenure which could explain the relationship that client identification has more influence on senior auditors than on junior auditors. Only work experience for an accountancy firm will not explain the negative moderator effect when used as a proxy for seniority.1
Table 4. Moderator Effect of Client Identification Between Tenure and State Skepticism
Variables Model 1 Model 2 Model 3 Model 4
Constant 4.27** 4.19** 4.19** 4.18** (.32) (.32) (.32) (.32) Control variables Female dummy -0.02 0.03 0.02 0.03 (.12) (.12) (.12) (.12) Big-four dummy 0.59** 0.51** 0.49** 0.48** (.18) (.18) (.18) (.18) Client tenure 0.00 -0.02 -0.02 -0.02 (.09) (.09) (.09) (.09) Client hours 0.03 0.06 0.07 0.07 (.07) (.07) (.07) (.07) Main effects Tenure 0.13* 0.13* 0.13* (.05) (.06) (.06) Client identification -0.04 -0.05 (.05) (.06) Moderator effect
Tenure x Client identification -0.03
(.06)
R² 0.12 0.14 0.15 0.15
ΔR² 0.12** 0.03* 0.00 0.00
Notes: Both seniority and client identification variables are standardized. Standard errors are shown in parentheses.
N=163. *p < 0.05, **p < 0.01
The third robustness check was performed to study which dimension of skepticism drives the moderator effect as shown in Table 2 and Figure 2. Again, the dimensions QM, SJ, and SK were used as dependent variable and all the other variables remained equal as in the initial
1 The moderator effect was also calculated when seniority was replaced with client tenure and work hours. These
tests also showed no significant results and will not explain why client identification has more influence on senior auditors than on junior auditors and their level of skepticism.
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regression analysis. The results for each dimension are plotted in Figures 3, 4, and 5 for QM, SJ and SK, respectively. All figures show clearly which dimensions drive the initial moderator results. However, only the moderator effect of QM shows a minimal significant negative result (b = -0.21, p < .1). Both SJ and SK have a negative outcome, but are not significant (b = -0.08 and b = -0.11, respectively). It can be concluded that the moderator effect between seniority and skepticism for different levels of client identification is mainly driven by the QM dimension.
If the moderator effect was separately performed on the high seniority and low seniority groups, based on very senior and partner as the high-seniority group and starter till senior as the low-seniority group, then no significant results were found. These results are not included in this study. No conclusions could be drawn from this additional analysis.
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5. Discussion
The exercise of skepticism by auditors is important to increase the overall audit quality (Knechel et al, 2013; IESBA, 2018; Nolder & Kadous, 2018). At this moment the level of skepticism is not at an appropriate level (IESBA, 2018), and therefore this study focused on the role of seniority on the auditor’s skepticism. From previous research it was not clear if seniority would have a positive or negative effect on skepticism (Nelson, 2009; Hurtt et al., 2013). This
20
study gives some more insight regarding this point of discussion. The results demonstrate that (1) seniority is positively related to a higher exercise of skepticism and (2) that client identification lowers the effect of seniority on skepticism. These findings indicate that seniority has a positive effect on skepticism, although high-levels of client identification negatively influence the exercise of skepticism by senior auditors.
This study provides several additions to the existing theory. The first theoretical contribution is that seniority is positively associated with the exercise of skepticism. Seniority of the auditor is based on the accumulated experience of an accountant based on education, training (Guiral, 2015; Christensen et al., 2016), expertise, and work-experiences (Topel, 1991; Christensen et al., 2016). A lot of research has focused on the relation between seniority and skepticism resulting in some conflicting results (Hurtt et al., 2013). This study shows that seniority helps auditors to remain skeptical while influenced by different situational factors. The deep knowledge structures (Guiral, 2015) and characteristics (Christensen et al., 2016) of senior auditors help them to improve the level of skepticism during their work. This would also support the reason that companies invest in their employees to improve the productivity and quality of future work performance (Flabbi & Ichino, 2001).
However, some researchers found negative relations between seniority and skepticism (Payne & Ramsey, 2005; Grenier, 2017). After performing the initial test, and also a robustness check on the three dimensions of skepticism, this study did not found evidence for a negative relation. A reason for this discrepancy could be that this study did not focus on particular characteristics of seniority, like fraud experience (Payne & Ramsay, 2005), and industry-based knowledge (Grenier, 2017). This study concludes from the data analyzed that seniority is positively related to skepticism.
For the second contribution the social identity theory was used to test the relation between client identification and skepticism. Client identification will result in less independence and objectivity towards the client, and that will affect skepticism negatively (Svanberg & Öhman, 2015). In line with the expectation, the results show a negative relation between the main effect of client identification and skepticism, however, this was not significant. A possible explanation for this could be that the participants in this study scored relatively low (M = 2.60 out of 7) on client identification, while other researchers mentioned that client identification is common in the accountancy profession (Lembke & Wilson, 1998; Bamber & Iyer, 2007; Knechel, 2016).
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Besides the relatively low scores of client identification by the participants in this study, it could also be that client identification is not directly linked to skepticism. Bamber & Iyer (2007) found evidence that client identification leads to the loss of objectivity and independence by auditors. This will probably lead to a lower level of skepticism, and therefore the reason for the non-significant outcome. This is due to an indirect relation between client identification and skepticism. Here, only one indirect relation is shown about the different impact of client identification on the different levels of seniority and the exercise of skepticism. To confirm if client identification could be directly related to skepticism, then an increase of participants in future research is recommended.
The moderator effect of client identification is the third and final theoretical contribution. Client identification decreases the positive effect of auditor’s seniority on skepticism. The first theoretical contribution shows that senior auditors are better to remain skeptical when facing situational factors, still the effect of client identification will be greater for senior accountants. This means that seniority will not always help to improve the level of skepticism. There are two explanations found for this contribution.
The first explanation is found in a report of the Monitoring Commissie Accountancy2 (Spiegel
voor de accountancysector, 2020), which states that there is still a lot of time-, budget-, and in
a lesser extent, work pressure by accountants. Senior accountants may experience additional pressure to overcome significant risks such as litigation, loss of client, and loss of firm reputation (Trotman et al., 2005). Senior accountants could struggle more with, on the one hand, have a good relationship with the client and, on the other hand, overcome significant risks. Senior auditors could lower the level of skepticism to reduce some of the pressures.
The second explanation is taken from the additional analysis of the moderator effect on the different dimensions. This analysis showed that the moderator effect of client identification is mainly driven by the questioning mind dimension of skepticism. This implies that senior auditors are less questioning the obtained information and evidence of clients with whom they identify. The same as with the industry-based knowledge research of Grenier (2017), this could imply that the knowledge about the client with whom senior auditors identify is higher, and therefore the auditors rely too much on the client-specific knowledge and are not questioning
22
their judgment process enough. This will have an impact on the level of skepticism of the auditor.
5.1 Practical implications
Besides the three theoretical contributions, this study adds also some new implications for practice. Senior auditors are more trained and experienced in their skeptical judgments (Hurtt et al., 2013; Knechel et al., 2013). This results in the first implication that the development of auditors, including the skeptical judgment, is important. This will increase the level of skepticism and thereby the audit quality. To improve the level of skepticism to an appropriate level, this study implies that the training of junior auditors about how to remain skeptical under situational factors is important. Where senior auditors are better to remain skeptical in different situations, they also must help their teams to deal appropriately with the multiple factors which can influence skeptical behavior.
The other practical implication is about the effect of the client on auditors. Especially senior auditors are less skeptical when they experience higher client identification. The results show that the senior auditors’ attachment with their clients leads to the loss of some independence and objectivity (Bamber & Iyer, 2007). To improve the level of skepticism, senior auditors must respond less to the clients’ factors and become more independent of them. The balance must be restored to increase the audit quality, which implies that the efficiency of the audit must be lowered to increase the effectiveness of the audit (Popova, 2013). This could be achieved by questioning the evidence of the client more and search for additional evidence of the assertions.
In conclusion, this study contributes to the existing literature and practice that in general senior auditors are having a higher level of skepticism than junior auditors. This means that junior auditors need training on how to remain skeptical when facing situational factors to improve their skeptical behavior. Furthermore, in this study it was found that a situational factor, client identification, has a negative impact on senior auditors. This implies that senior auditors must become more independent of the client to increase their level of skepticism. Overall, for both junior and senior auditors there are opportunities to improve the level of skepticism and thereby the audit quality.
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5.2 Limitations and future directions
In order to carefully interpret the results and draw conclusions it is import to discuss some limitations of this study. The characteristics of this study must be taken into account and this means that the cross-sectional design of this study limits the ability to draw empirical conclusions about the directions of causality. In addition, the survey methodology could lead to social desirability bias. Social desirability bias means that respondents do not disclose their actual behavior because they will protect the reputation of the audit firm or accounting profession and hence also indirectly their reputation. It is hard to completely rule out this bias when collecting sensitive data (Otley & Pierce 1995). To reduce the social desirability bias as much as possible the three steps of Cohen et al. (2017) were followed: the responses were assured to be kept strictly confidential, the auditors were told to fill in the answer they came up first in mind, and existing validated scales were used. Furthermore, the variable seniority is not affected by social desirability bias because seniority is based on the auditors’ current role within their audit firm. Different study designs and the repeated use of the measurements in this study give the possibility to cover these limitations in future research.
This study has focused on the variable seniority which includes many aspects, like experience and training. One limitation of using seniority is that it is hard to determine which aspect of seniority is the driving factor for the exercise of skepticism. Here it is showed as result that an aspect of seniority, i.e. the tenure of the auditor at the current accountancy firm, is significantly related to skepticism. Future research could focus on other aspects of seniority to see which underlying aspects of seniority are important for the exercise of skepticism. For instance, if the permanent education of auditors is positively related to a higher level of skepticism. It is important to understand which aspect of auditors’ development can improve the level of skepticism.
Moreover, from literature it seemed that client identification would be negatively related to skepticism (Bamber & Iyer, 2007; Svanberg & Öhman, 2015; Harding et al., 2016). However, this study did not confirm if this is empirically true. Future research could increase the number of participants to investigate if this will lead to empirical proof. This can be done by sending the survey to a larger database of auditors. One limitation of using a larger database is the change of non-response bias, because this process will be less personally. Furthermore, the
24
participants only had to fill in the survey with one client in mind. The strength of this approach is that the answers of the participants are more concrete. However, with this approach it was not possible to measure the individual effect of the level of skepticism if it is higher (or lower) when an auditor does, or does not, identify with the client. Future research could use an experimental research design in which participants can be tested twice on the exercise of skepticism when identifying and when not identifying with the client. This experimental design could result in different results, because it will measure the effect of a client on a more individual basis.
Another limitation might be that the external validity of the data is limited. The persons invited for this study included only Dutch auditors. There are cross-country differences in auditing (Boolaky, 2011; Glaum et al., 2018), thus these results may not be applicable in every country. Nevertheless, every country has to deal with working closely with clients and building relationships and seniority. Therefore, it can be assumed that the results can be generalized to other countries. Additional research could find out if this assumption is correct and there are no cross-country differences
Lastly, it could be interesting to expand this research by looking at differences between Big-four and Big-four companies. There can be a difference between Big-Big-four and Non-Big-four companies because the quality between the firms (Sundgren & Svanstrom, 2014), and the sort of clients are different (Francis, 2004). When making this distinction, the results could eventually show if the internal learning and awareness concerning skepticism are at an appropriate level within these firms.
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Appendix
Below the survey is shown that is used in this study. The participants had to take one client in mind when answering the questions3. First, they had to give a short description of the client and answer the following two questions:
— How long do you work for his client? ___________Year ___________Month — How many hours have you worked for this client? ___________Hours
After they had taken a client in mind the following questions were asked.
State skepticism (7 item-scale: (1) strongly disagree till (7) strongly agree) 4
— Overall, I tended to question the statements that I read from [name client].
— While working on this engagement, I frequently questioned things that I saw or read. — While working on this engagement, I had a tendency to reject statements unless I had proof
that they were true.
— While working on this engagement, I took my time when making decisions.
— During this engagement, I did not like deciding until I had a chance to look at all of the available information.
— I did not like having to make decisions quickly while working on this engagement.
— While working on this engagement, I tried to ensure that I had considered most available information before making a decision.
— While completing this engagement, I waited to make decisions until I could get more information.
— I felt that reading client materials would give me a better chance to arrive at correct assessments.
— I tended to read closely and compare between different sections of client documentation in order to improve my chances of making a correct assessment.
— I actively sought out all of the information that I could while completing this engagement. — I used all resources available to me to get all of the information that I could, in this
engagement.
3 The questions were translated to Dutch, because all the participants were Dutch-speaking.
32 Seniority
— What is your current function? _______________________________ — How would you describe your own level of seniority within the organization:
Starter – Junior - Medior - Senior - Very senior
Client identification (7 item-scale: (1) strongly disagree till (7) strongly agree) — When someone criticizes this client, it feels like a personal insult.
— I am very interested about what others think about this client. — When I talk about this client I usually say ‘we’ rather than ‘they’. — This client’s successes are my successes.
— When someone praises this client, it feels like a personal compliment. — If a story in the media criticized this audit firm, I would feel embarrassed.
