Transcript The Influence of a Self-Interest Threat to Auditor Independence and

Business School
The Influence of a Self-Interest Threat to Auditor
Independence and Emotion on Auditors’ Inventory
Judgments
Janne Chung – York University
Jeffrey Cohen – Boston College
Gary Monroe - UNSW
Overview of the paper
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Using an experiment, we investigate the effects of ethical
conflict and emotion on auditors’ inventory judgments
We manipulate emotion and self interest threat in an
experimental case and ask auditors what inventory value
they will recommend for the client in the case materials
We expect that the presence of a self interest threat will lead
individuals to value the client’s ending inventory less
conservatively
We expect that a more positive emotion will lead to less
conservative inventory judgments compared to a more
negative emotion.
We expect an interaction effect between self interest threat
and emotion
The results confirm our expectations
Introduction
• We examine whether the presence/absence of a job
offer from an audit client affects auditors’ judgments
– Job offer during the audit of the client creates a
potential conflict of interest (self-interest threat)
• We examine the effect of emotion on audit judgment
– Affective states including emotion have a long
history in the psychology literature, but have been
largely overlooked by auditing researchers
– We extend the findings in the psychology
literature to the audit profession and contribute to
our understanding of how emotion could affect
audit judgment
Introduction
• Psychology literature reports that affective state (mood)
impacts ethical decision-making
– Apart from Connelly et al. (2004) who examine management
issues using college students, no study has examined the
effect of emotion on ethical decision-making
– With the exception of Cianci and Bierstaker (2009) who
examine the effects of moods on ethical decision-making in
a hypotheses-generation task, we are not aware of any other
auditing study that has examined this issue
– Therefore, we examine the interaction effects between
emotion and the presence (absence) of an self interest threat
on audit judgment
Ethical conflict
• People tend to respond to conflicts of interest through
decision-making biases (Bastedo 2009).
– When individuals are presented with situations where
personal self-interest is contrary to ethical behavior, their
response is potentially one of self-interest. This bias is
unconscious, which makes it difficult for people to
recognize that their decision is affected by self-interest
(Moore and Loewenstein 2004)
– Self-interest may play a role in strengthening people’s
decision heuristics such as unconsciously biasing even
routine decision-making (Chugh, Bazerman, and Banaji
2005; Simon, 1957; Tversky and Kahneman 1974).
– Conflicts of interest create ethical dilemmas that
influence an individual’s independence (Premeaux 2004)
Ethical conflict
• When a client makes a job offer to an audit team member, it
could create a conflict of interest for the audit staff member
– auditor may act as an advocate for the client by making
decisions that are in the client’s favor, for example, by
signing off on less conservative asset or liability values.
H1: Participants who read case materials containing a conflict of
interest expect an auditor to act out of self-interest by
recommending less conservative inventory values to the audit
manager compared to participants who did not read case
materials containing a conflict of interest.
Emotions
• Positive affect
– results in positive views of the judgment
context
– leads to more positive judgments of self and
others (Clore et al. 1994)
– more likely to overestimate the likelihood of
favorable events occurring and underestimate
the likelihood of unfavorable events occurring
(Nygren et al. 1996)
– Chung, Cohen and Monroe (2008) find that
positive affective state (mood) leads to less
conservative inventory valuation by auditors
Emotions
• Negative affect
– results in negative views
– leads to more negative evaluations and actions
(Forgas 1992)
– Kadous (2001) demonstrates that negative
emotions in an auditor negligence case affected
jurors’ judgment of auditors - higher levels of
negative emotion resulted in a more negative
evaluation of auditors and higher penalties were
handed out to them
– Chung, Cohen and Monroe (2008) find that
negative affective state (mood) leads to more
conservative inventory valuation by auditors
Emotions
We manipulate emotion as positive, neutral and
negative
H2: Participants in the negative emotion
condition expect an auditor to recommend
inventory values to the audit manager that
are more conservative compared to
auditors in the positive emotion condition.
Joint effects of self-interest and emotion
H3a: Positive-emotion participants who read case materials
that contained a job offer expect an auditor to make
significantly less conservative judgments relative to all
other conditions.
H3b: Negative-emotion participants who read case materials
that did not contain a job offer expect an auditor to make
significantly more conservative judgments relative to all
other conditions.
H3c: Positive-emotion participants who read case materials
that contained a job offer expect an auditor make
significantly less conservative judgments relative to
negative-emotion participants who read case materials
that did not contain a job offer.
Inventory valuation
Figure 1 showing expected effects between self-interest threat and emotion on inventory
valuation for Experiment One
Positive emotion
Neutral emotion
Self-interest threat absent
□______________ Self-interest threat present
Negative emotion
Participants
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96 (49 males and 47 females) auditors with 4+ years
of experience – 51 in-charge seniors and 45
supervisors or managers
– average age - 30 years
– average working experience - 101 months
– average accounting working experience - 91
months
– average auditing working experience - 84 months
– average of 13 inventory audits
– 76% worked for Big 4 firms
Paid $50 for participating
Experiment
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Participants read experimental materials about an
audit client. First, read information concerning Pat,
an in-charge audit senior whose career progression
is on track
– To create self-interest threat, half read case
materials informing them that Pat is considering
accepting a very attractive job offer from the client
and he had not disclosed this
– Other half read case materials that did not contain
a job offer
Next, all participants were told that Pat is assigned
the inventory section of the audit of an electronics
manufacturing company
Experiment
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All participants given same background information about the
client, e.g., history of client, financial statements, information
on corporate governance
Detailed information specific to the current year’s audit of
inventory was provided
– Participants informed that procedures for this section of the
audit had been satisfactorily completed
– However, difference of opinion between Pat and the client
regarding the valuation of inventory
– Initial audit testing indicated caused Pat to estimate
inventory should be valued at $136,000,000 compared to the
client’s carrying amount of $148,000,000
Experiment
• Participants informed that Pat meets with client’s financial
controller (FC) to discuss possibility that inventory may be
overstated, next course of action to take, and possibility of
hiring independent valuers
 At this point, the emotion manipulation was introduced.
• Participants read the conversation between Pat and the VP
– Positive emotion - materials describe a kind, helpful, and
courteous FC
– Neutral emotion – materials describe a FC who is neither
mean nor kind, helpful nor unhelpful, and discourteous
nor courteous
– Negative emotion – materials describe a mean,
unhelpful, and discourteous FC
Experiment
• Based on the conversation between Pat and the FC, the
services of two independent appraisers (A and B) are
secured and both return a range of valuations that are lower
than the client’s with A’s being lower than B’s.
– A: 129,600,000 – 134,000,000
– B: 137,400,000 – 140,600,000
• Participants then answered two questions
– What inventory balance would Pat recommend to the
audit manager?
– What inventory balance would you recommend to the
audit manager?
• they wrote down the value
• Participants then responded to manipulation checks and
provided demographic data.
Manipulation checks
• Pleasure, Arousal, and Dominance (PAD) scale used to
measure emotions and responses to environmental stimuli
– PAD scale does not purport to measure emotions per se,
instead it assesses the perceived pleasure, arousal and
dominance elicited by a set of environmental stimuli
– Pretesting indicated our case materials only triggered
the Pleasure dimension so we only included scales
relating to that dimension
– 7 items anchored by: pleased (annoyed); hopeful
(despairing); happy (unhappy); satisfied (unsatisfied);
relaxed (bored); contented (melancholic); and stimulated
(relaxed)
– Responses on a 7-point scale – we sum the scores for
the 7 items – higher score is more negative
Manipulation checks
• Results for PAD
– positive 17.4 (6.6)
– neutral 24.1 (6.2)
– negative 35.5 (4.5)
• ANOVA and Games-Howell tests used to test differences
– positive-emotion participants experienced higher pleasure
than neutral-emotion participants (p < .001)
– neutral-emotion participants experienced higher pleasure
than negative-emotion participants (p < .0001)
• Self rated their expertise – relatively high - 5 out of 7
• Rated realism of case materials – good - 4.8 out of 7
Results
More conservative is lower value
Dependent Variable: Pat’s Inventory Balancea
Self-interest threat
Absent
Present
Mean (sd)
Mean (sd)
136,707,000
138,271,000
(1,322,000)
(2,101,000)
Total
137,538,000
(1,923,000)
Neutral
136,075,000
(2,505,000)
137,281,000
(1,766,000)
136,678,000
(2,219,000)
Negative
135,438,000
(1,748,000)
136,281,000
(2,259,000)
135,860,000
(2,033,000)
Total
136,060,000
(1,961,000)
137,298,000
(2,173,000)
136,692,000
(2,153,000)
Emotion
Positive
Results
Panel B: Tests of Between-Subjects Effects
Source
Type III Sum of df Mean Square
Squares
Corrected Model
8.189E+13
5 1.638E+13
Intercept
1.791E+18
1 1.791E+18
Self-Interest
3.478E+13
1 3.478E+13
Emotion
4.239E+13
2 2.119E+13
Self-Interest * Emotion
2.071E+12
2 1.035E+12
Error
3.584E+14 90 3.983E+12
Total
1.794E+18 96
Corrected Total
4.403E+14 95
a. R Squared = .186 (Adjusted R Squared = .141)
F
4.112
449686.065
8.733
5.322
.260
Sig.
.002
.000
.004
.007
.772
Results
Contrast coding used
Panel C: Contrast results (two-tailed)*
Contrast
Contrast 1, presence of self-interest
threat in the positive emotion will be
significantly less conservative than all
the other cells (H3a).
Contrast 2, absence of self-interest threat
in the negative emotion will be
significantly more conservative than all
the other cells (H3b).
Contrast 3, presence of self-interest
threat in the positive emotion will be
significantly less conservative than
absence of self-interest threat in the
negative emotion. (H3c)
Value of
Contrast
9571274
Std. Error
2667968
-7427254
2733033
-2.718
.008
2833088
695120
4.076
.000
* The overall contrast is significant at p = .002 (F = 4.112).
t
Sig.
3.587 .001
Results