An Examination of Audit Managers’ Preference for the Underreporting of Time by Their Audit Staff

When:
May 7, 2010 @ 10:30 am – 12:00 pm America/New York Timezone
2010-05-07T10:30:00-04:00
2010-05-07T12:00:00-04:00
Where:
CEAR
35 Broad Street Northwest
Atlanta, GA 30303
USA
Cost:
Free
Contact:
CEAR

RCB 300 – from 10:30 – 12:00pm

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The Public Oversight Board (2000) has raised concerns over the underreporting of time on audit engagements, noting that the practice can negatively affect audit quality and lead to other unethical behaviors which lead to increased audit risk. While the practice is prohibited by audit firm policies, if underreporting by engagement staff is tacitly rewarded by the audit managers evaluating staff work, an environment is created in which underreporting time may be necessary for staff to succeed and advance within the firm. Our study considers the role of audit managers in perpetuating the practice of underreporting by examining the extent to which, and under what conditions, managers accept (i.e., implicitly reward) such behavior in their audit staff. Utilizing an experiment in which engagement staff appear to have worked more hours than were budgeted, we manipulate staff reporting accuracy (underreporting hours worked in order to meet budget versus accurately reporting exceeding the budget) and managers’ personal preference for the client (high versus low). We find that staff reporting accuracy and managers’ personal preferences for the client interact disordinally to affect managers’ performance evaluations of staff, with the highest evaluations going to staff who underreport when the manager’s preference for the client is high, and the lowest going to staff who accurately report that they have exceeded budget when the manager’s preference for the client is high. Further, we find that managers are more likely to request an underreporter on a different engagement, regardless of their preference for the current client. These results are consistent with agency theory and suggest that managers’ own incentive structures influence how they evaluate their

audit staff, contributing to an environment that implicitly rewards underreporting of time even though firm policy explicitly prohibits the behavior.