Documentos de Académico
Documentos de Profesional
Documentos de Cultura
DOI 10.1007/s10551-008-9752-x
ABSTRACT. The recent accounting scandals have satisfying past experiences with the client regardless of
raised concerns regarding the closeness of auditor–client their beliefs about the honesty and trustworthiness of the
relationships. Critics argue that as the relationship client’s management. Lastly, auditors’ moral reasoning
lengthens a bond develops and auditors’ professional was not related to their trust in the client’s management.
skepticism may be replaced with trust. However, State-
ment on Auditing Standards No. 99 states that auditors KEY WORDS: auditor trust, fraud risk, moral reason-
‘‘should conduct the engagement with a mindset that ing, professional skepticism
recognizes the possibility that a material misstatement due
to fraud could be present, regardless of any past experi- ABBREVIATIONS: AICPA: American Institute of
ence with the entity and regardless of the auditor’s belief Certified Public Accountants; CFI: comparative fit index;
about management’s honesty and integrity’’ (AICPA CPA: Certified Public Accountants; DIT: Defining Issues
2002, Statement on Auditing Standards No. 99, paragraph Test; PCAOB: Public Company Accounting Oversight
13, p. 10). The purpose of this study is to investigate Board; RMSEA: root mean square error of approxima-
whether auditors develop trust in a client’s management tion; SAS: Statement on Auditing Standards
and whether this trust affects auditors’ decisions. Specifi-
cally, this study examines whether auditors’ satisfaction
with a client’s management during a prior audit engage-
ment affects auditors’ self-reported trust in that client’s Introduction
management and whether that trust affects their fraud risk
assessment. The decision to trust a client’s management Recent accounting scandals have ignited an
should be an ethical decision because excessive trust may increased interest in fraudulent financial reporting
impair auditors’ skepticism, which auditors are required among professionals, regulators, and academics. In
to maintain by their professional responsibilities. We 1997, the American Institute of Certified Public
therefore also investigate whether auditors’ trust is Accountants (AICPA) issued Statement on Auditing
affected by their moral reasoning. An experimental case Standards (SAS) No. 82, Consideration of Fraud in a
was completed by 89 professional auditors, all with Financial Statement Audit. This standard requires
experience assessing the risk of fraud. The results suggest auditors to specifically assess the risk of material
auditors’ satisfaction with the client affects their trust in
misstatement due to fraud and provides guidance on
the client (higher satisfaction associated with higher trust
and lower satisfaction associated with lower trust). Fur-
the response to the results of the assessment.1 Fur-
ther, after an overall unsatisfying experience, auditors’ thermore, in October 2002, the AICPA superseded
trust affects their fraud risk assessments. However, after an SAS No. 82 with SAS No. 99, also titled Consid-
overall satisfying experience, their trust does not affect eration of Fraud in a Financial Statement Audit. This
their fraud risk assessments. The results indicate auditors new standard provides auditors additional guidance
are able to maintain their professional skepticism after in fulfilling their responsibilities relating to detecting
110 William A. Kerler III and Larry N. Killough
fraud in a financial statement audit. A key provision explanation of an unusual account fluctuation
in SAS No. 99 is an increased emphasis on profes- without collecting evidence to verify the client’s
sional skepticism, which is defined as ‘‘an attitude explanation.2
that includes a questioning mind and a critical SAS No. 99 specifically addresses the potential of
assessment of audit evidence’’ (AICPA, 2002, para- auditors’ professional skepticism being impaired due
graph 13, p. 10). to previous interactions with an audit client. The
While the purpose of an audit is to provide an standard states that auditors ‘‘should conduct
objective review of a company’s financial statements the engagement with a mindset that recognizes the
(Messsier et al., 2006), the value of an audit depends possibility that a material misstatement due to fraud
on stakeholders’ (e.g. investors, potential investors, could be present, regardless of any past experience
creditors, etc.) perceptions of auditors’ objectivity, with the entity and regardless of the auditor’s belief
independence, and professional skepticism. Although about management’s honesty and integrity’’
auditors are required by SAS No. 99 to maintain their (AICPA, 2002, paragraph 13, p. 10). This study
professional skepticism, it has been argued that as the examines whether auditors develop trust in a client’s
auditor–client relationship lengthens, an auditor’s management and whether this trust affects their audit
skepticism can become impaired. In a Wall Street decisions. Specifically, we test whether auditors’
Journal article published shortly after the Enron fiasco, satisfaction working with a client during a previous
Herrick and Barrionuevo (2002) raise the question of audit engagement affects auditors’ trust in that cli-
whether Arthur Andersen’s close relationship with ent’s management. We also explore whether audi-
Enron affected Andersen’s ability to objectively tors’ trust in the client’s management affects their
review Enron’s financial statements. Johnstone et al. fraud risk assessment.
(2001) suggest an interpersonal relationship between While in many business contexts the decision to
auditor and auditee may ‘‘affect the auditor’s ability to trust someone is not likely an ethical decision, the
exercise an appropriate level of professional skepti- auditing environment is unique because trusting a
cism’’ (p. 5). One potential threat that may impair client’s management may impair auditors’ profes-
auditors’ professional skepticism is if auditors develop sional skepticism and hence violates the requirements
trust in a client’s management. Trust is defined in this of SAS No. 99. Any decision that goes against auditing
study as auditors’ belief in management’s intentions to standards and may lead to an impairment of skepticism
compile the company’s financial statements following should be an ethical decision. One way individuals
applicable laws and standards and to provide auditors make ethical judgments is through the use of justice-
with all relevant information they need to audit the based concepts. Kohlberg (1969) developed a justice-
financial statements. Most auditor–client relationships based model of moral reasoning, which has been used
involve year-round communication via face-to-face for research in a variety of disciplines (e.g. education,
meetings, telephone conversations, etc. Research in marketing, psychology). The research demonstrates
other arenas suggests that trust develops, at least in that individuals’ moral reasoning affects their deci-
part, as a function of successful/satisfying prior sions and behaviors (see Rest et al., 1999a). In
experience with an individual or group (e.g. Doney accounting settings, researchers find accountants with
and Cannon, 1997; Flores and Solomon, 1998; higher levels of moral reasoning generally make more
Ganesan, 1994; Ring and Van De Ven, 1992). ethical decisions and behave in a more ethical manner
Further, some accounting researchers claim that ‘‘a (e.g. Ponemon, 1992; Tsui and Gul, 1996). Because
behavioral bond develops between auditor and trusting a client’s management may impair auditors’
auditee as they become more familiar with each other skepticism, and thus may compromise auditors’ pro-
and mutual trust replaces the auditor’s necessary fessional responsibilities (e.g. SAS No. 99), this study
professional skepticism’’ (Latham et al., 1998, p. 168). examines whether the extent to which auditors trust a
If auditors’ trust in client’s management impairs their client’s management is affected by auditors’ moral
professional skepticism, it can affect their audit deci- reasoning.
sions and ultimately the quality of the audit. For This paper reports the results of an experimental
example, auditors who develop trust in a client’s case completed by 89 professional auditors, all with
management may be willing to accept a client’s experience assessing fraud risk. The experimental
Auditors’ Trust 111
case utilized was identical for all subjects with the The remainder of this study is organized into four
exception of the description of the results for the sections. We first present the relevant literature and
previous year’s audit. Auditors received one of two develop our hypotheses and research question. The
experimental cases. In the ‘‘satisfying’’ manipulation, second section discusses the research methods and
the results of the prior year’s audit engagement were the third presents the results. We conclude with a
presented to create an overall satisfying experience summary of the main research findings and a dis-
working with the client’s management, while the cussion of the implications, contributions, and lim-
‘‘unsatisfying’’ manipulation was designed to create itations of the study.
an overall unsatisfying experience working with the
client’s management. The results of path analyses
indicate that auditors’ satisfaction with the client’s Prior literature
management during a prior audit engagement is
positively related to their trust in the client’s man- Satisfaction with a client’s management during
agement (i.e. higher satisfaction associated with a previous audit engagement and trust
higher trust and lower satisfaction associated with
lower trust). We also find that after a satisfying We utilize the framework of trust from Nooteboom
previous experience, this trust does not affect their (1996) because of its adaptability to an auditing
level of perceived risk of management fraud. Thus, context. In this framework, an individual’s trust in
although auditors’ trust in a client’s management another person or group consists of two dimensions.
may increase due to a satisfying previous experience, The first, competence trust, refers to the trust an
auditors are able to maintain their professional individual may have in another’s ability to perform;
skepticism regardless of their beliefs about the hon- while the second, goodwill trust, refers to the trust in
esty and trustworthiness of the client’s management. another’s intentions to perform (Nooteboom, 1996,
However, after an unsatisfying previous experience p. 990).3 We control for competence trust, as it is
with the client’s management, auditors’ trust is not of primary interest in this study. Goodwill trust
negatively related to their perceived risk of man- (hereafter, trust) is the focus in this study and is
agement fraud (i.e. lower trust associated with higher defined in an auditor–client context as auditors’
risk). This suggests, as we would expect, as auditors’ belief in management’s intentions to accurately
trust in a client’s management decreases due to an compile the company’s financial statements and to
unsatisfying prior experience, auditors become more provide auditors with all relevant information audi-
skeptical of that management. Finally, contrary to tors needs to evaluate the fairness of the client’s
our expectations, auditors’ moral reasoning was not financial statements. Auditors’ trust in management
related to their trust in a client’s management. would include beliefs regarding management’s
Implications for financial statement users, standard honesty, dependability, helpfulness, etc. In essence,
setters, and the profession will be discussed in the trusting management indicates auditors believe:
concluding section of this paper. management means well, management is represented
This study differs from previous research and by good people, and management will do the right
contributes to the literature in three ways: (1) to our thing.
knowledge, this is the only study to explicitly Although not the object of extensive empirical
measure and investigate whether auditors develop testing, previous research suggests that trust develops
trust in a client’s management and to examine (deteriorates), at least in part, as a function of suc-
whether trust affects their decisions; (2) we develop a cessful/satisfying (negative/unsatisfying) prior expe-
measure of auditors’ trust in a client’s management riences with an individual or group (e.g. Doney and
that may prove useful for future auditing judgment Cannon, 1997; Flores and Solomon, 1998; Ganesan,
and decision-making research; and, (3) we examine 1994; Ring and Van De Ven, 1992). We found two
whether moral reasoning affects auditors’ trust in the studies in the field of auditing that identify and test
client’s management. The concluding section of this this relationship. Shaub (1996) finds that auditors
paper will elaborate on these contributions as well as who receive information about inaccuracies in the
provide suggestions for future research. previous year’s inventory evaluate both the likelihood
112 William A. Kerler III and Larry N. Killough
of the current year’s inventory as being overstated fraud will refer to the intentional misstatement of the
and the likelihood of requiring more audit proce- financial statements
dures as higher compared to auditors who do not To our knowledge, no previous auditing research
receive information regarding inaccuracies. These has explicitly measured and examined the effect of
results support that auditors’ trust in the client’s trust on auditors’ decisions. Further, the connection
management decreases when inaccuracies are between trust and perceived risk of management
revealed in the previous year’s audit results. Although fraud has not been examined. One stream of
Shaub (1996) provides preliminary evidence research, however, has investigated the effect that
regarding the effect on trust of satisfaction with a auditors’ beliefs regarding management’s integrity
client during a previous experience, the inaccuracies has on auditors’ decisions and suggests that such
represent an unsatisfying prior audit experience with beliefs may affect auditors’ trust in that management.
the client’s competence and therefore the study This research stream finds the client’s integrity
addresses competence trust. King (2002) conducted influences auditors’ business and combined risk
an experiment using student subjects performing a assessments (Beaulieu, 2001), acceptance of client
task devoid of any auditing context (i.e. the exper- explanations (Peecher, 1996), and likelihood assess-
imental task made no mention of auditing, auditors, ments of account overstatement and required write-
or fraud). King’s (2002) results suggest that the downs (Goodwin, 1999). For example, Beaulieu
communication of a client’s management can induce (2001) finds that the auditors’ perceived level of
auditors to develop unwarranted trust in the man- client integrity is negatively related to their assess-
agement; however, this effect is mitigated when ments of the client’s business and combined risk (i.e.
auditors belong to groups, which create social lower integrity related to higher risk). Although
pressures. King’s study provides evidence that audi- none of these studies specifically addresses the issue
tors may develop trust in client’s management as a of measuring trust, it is possible that the manipula-
result of interactions with management. tions of integrity affect auditors’ trust. Based on this
This study attempts to explicitly measure and test possibility, we would expect a negative relationship
the effect that auditors’ satisfaction working with the between auditors’ trust in client’s management and
client’s management during a prior audit engage- auditors’ perceived risk of management fraud.
ment has on auditors’ trust in that client. Based on However, this potential relationship between
the above research, we expect higher levels of auditors’ trust and their audit decisions provides a
auditors’ satisfaction working with the client’s unique environment where expectations from prior
management to be related to higher levels of trust in research conflict with professional requirements.
that client’s management. Stated formally: SAS No. 99 states that auditors ‘‘should conduct
the engagement with a mindset that recognizes the
H1: Auditors’ satisfaction working with the client’s possibility that a material misstatement due to fraud
management during a prior audit engagement could be present, regardless of any past experience
will be positively related to auditors’ trust in with the entity and regardless of the auditor’s
that management. belief about management’s honesty and integrity’’
(AICPA, 2002, paragraph 13, p. 10). This implies
auditors’ decisions should not be affected by in-
Trust and perceived risk of management fraud creased levels of trust in the client’s management.
Therefore, auditors should maintain their profes-
SAS No. 99 distinguishes two types of fraud auditors sional skepticism despite a satisfying experience
should be cognizant of during a financial statement working with the client’s management during a
audit: misstatements arising from fraudulent financial prior audit engagement and despite any trust they
reporting and misstatements arising from misappro- may have in the client’s management. Based on
priation of assets. The first involves intentionally this auditing standard, we would expect no rela-
falsifying the financial statements to deceive users; tionship between auditors’ trust in the client’s
while the second involves the theft of the company’s management and auditors’ perceived risk of man-
assets. For the purposes of this study, management agement fraud.
Auditors’ Trust 113
Because expectations based on previous research Barrionuevo (2002) questioned whether the close
conflict with expectations based on professional relationship between Enron and their auditors
standards, we are unable to make a formal hypothesis affected the auditors’ ability to objectively review
regarding the relationship between auditors’ trust and Enron’s financial statements. These beliefs indicate
their perceived risk of management fraud. Instead, we that auditors’ decision to trust a client’s management
will explore the following research question: may impair their skepticism and may compromise
auditors’ professional responsibilities (e.g. SAS No.
RQ1: Is auditors’ trust in the client’s management 99); thus, the extent to which to trust a client’s
related to their fraud risk assessments? management should be an ethical decision.
At the heart of moral reasoning research is the
question of how and why individuals make decisions
Moral reasoning and trust when an ethical dilemma presents itself.4 Based on
the work of the child psychologist Piaget, Lawrence
Although auditors are required by SAS No. 99 to Kohlberg (1969) developed a justice-based model of
maintain their professional skepticism, some believe moral reasoning that consists of a series of three
that mutual trust may develop between auditors and cognitive levels, with each level containing two
their clients as they become more familiar with each stages (see Table I). According to Kohlberg, indi-
other and this trust may replace auditors’ necessary viduals develop sequentially one stage at a time. An
skepticism (e.g. Latham et al., 1998). Johnstone individual’s ethical reasoning process in the first
et al.’s (2001) framework for independence risk level, preconventional level, revolves around pun-
posits that an interpersonal relationship between ishment and self-interest. In the conventional level,
auditors and their clients is an incentive for impaired reasoning is influenced by wanting to please others,
independence. Presumably then, the trust that may such as peers or the law. In the final level, post-
develop from the relationship would also be a threat conventional level, an individual’s reasoning
to auditors’ independence. Furthermore, shortly involves individual rights, self-chosen principles, and
after the Enron accounting scandal, Herrick and belief in ideals, such as equality and justice.
TABLE I
Kohlberg’s six-stage model of moral reasoning
Preconventional level
Stage 1 Obedience and punishment orientation
At this stage punishment or harm determines what is right or wrong.
Stage 2 Naively egoistic orientation
At this stage an individual acts to serve his/her own interests.
Conventional level
Stage 3 Good-Boy (or Good-Girl) orientation
At this stage one strives to be a good person in the eyes of others. Good behavior
is that which pleases others
Stage 4 Authority and social-order maintaining orientation
At this stage there is an orientation toward obeying authority and maintaining the social order.
Postconventional level
Stage 5 Contractual legalistic orientation
At this stage the right action tends to be defined in terms of general individual rights,
not necessarily what is agreed upon by society.
Stage 6 Conscience or Principle Orientation
At this stage one follows self-chosen ethical principles. There is a belief in ideals such
as justice and equality.
instrument that they did not understand what an ‘‘Strongly Agree’’). To test the two hypotheses and
item was asking) or insufficient factor loadings.6, 7 investigate the research question, we utilize auditors’
The remaining eight items loaded on a single factor, mean response to the five items as our measure of
which explained over 60 percent of the variance and trust in the client’s management.
had a Cronbach’s Alpha of 0.90.
The second pilot study was conducted to further Perceived risk of management fraud
refine the trust scale. This pilot study also required As discussed previously, management fraud in this
participants to complete the entire experimental study refers to the intentional misstatement of the
instrument which included the remaining eight trust financial statements. Participants assessed the risk of
items identified in the first pilot study. Participants management fraud for the current year’s audit. This
for this pilot study consisted of 58 practicing auditors was based on a five-point Likert-type scale with
from each of the Big Four firms and nine Non-Big anchors on the endpoints and midpoint (1 – ‘‘Very
Four firms. Of the 58 subjects, 30 were from Low Risk,’’ 3 – ‘‘Medium Risk,’’ 5 – ‘‘Very High
Non-Big Four firms, 25 were from Big Four firms, Risk’’).
and three did not indicate. They had an average of
7.39 years of auditing experience and included ten Moral reasoning
(17.2 percent) staff, 18 (31.0 percent) in-charge, 22 The Defining Issues Test (DIT), developed by Rest
(37.9 percent) managers, and eight (13.8 percent) (1979), measures an individual’s moral reasoning
partners. There were 36 male auditors and 22 female ‘‘based on the premise that people at different levels
auditors. Lastly, 50 participants indicated they had of moral development interpret moral dilemmas
experience assessing fraud risk while eight did not differently, define the critical issues of the dilemmas
have experience. Participant responses to the trust differently, and have different intuitions about what
items were analyzed, and based on a PCA with is right in a situation’’ (Kaplan et al., 1997, pp. 45–46).
varimax rotation, three items were eliminated. The The DIT used consists of three standard hypothetical
remaining five items loaded on a single factor, which moral dilemmas with each dilemma followed by
explained over 69 percent of the variance and had a twelve statements of issues reflecting the different
Cronbach’s Alpha of 0.89.8 These psychometric stages of moral reasoning.9 Participants read the di-
properties of the five-item trust scale were deemed lemma, make an action choice, and then rank which
satisfactory; hence, the scale was included in our final of the given issues are important in their decision
instrument (see Table II for final five items). Par- making. The analysis of the DIT yields the indi-
ticipants’ responded to the five items on a seven- vidual’s level of ‘‘principled’’ thinking (stages 5 and
point Likert-type scale with anchors at each point 6), hereafter called the p-score.10 The p-score, which
(1 – ‘‘Strongly Disagree,’’ 2 – ‘‘Disagree,’’ 3 – ‘‘summarizes the ranking data and is defined as the
‘‘Slightly Disagree,’’ 4 – ‘‘Neither Agree nor weighted sum of the ranked principled issues’’
Disagree,’’ 5 – ‘‘Slightly Agree,’’ 6 – ‘‘Agree,’’ 7 – (Thoma et al., 1991, p. 664), is calculated and
TABLE II
Trust scale items
transformed into a percentage ranging from 0 to groups, a total of 113 cases were completed.14 Of the
95.11 113 instruments completed, 23 were excluded
because subjects indicated they had no experience
Control variables assessing the risk of fraud.15 One additional subject
As discussed previously, we controlled the compe- was excluded because he/she failed to provide a
tence of the client’s management. To verify the fraud risk assessment. Thus, our analysis is based on
control was successful, auditors responded to the responses from 89 auditors.
following statement: ‘‘XYZ’s [the audit client] man- Table III provides a number of descriptive statis-
agement is competent.’’ Responses were on a seven- tics, which show that 51 (57.3 percent) and 38 (42.7
point Likert-type scale with anchors at each point percent) of the participants were from Non-Big Four
(1 – ‘‘Strongly Disagree,’’ 2 – ‘‘Disagree,’’ 3 – firms and Big Four firms, respectively. Further, the 51
‘‘Slightly Disagree,’’ 4 – ‘‘Neither Agree nor Dis- Non-Big Four auditors were employed at firms of
agree,’’ 5 – ‘‘Slightly Agree,’’ 6 – ‘‘Agree,’’ 7 – varying sizes, including national, regional, and local.
‘‘Strongly Agree’’). Participants also provided the The subjects included a variety of position levels
following demographic variables: gender, firm (Big within the firms: six (6.7 percent) staff, 11 (12.4 per-
Four or Non-Big Four), years of auditing experience cent) in-charge, 32 (36.0 percent) managers, and 40
(in years), rank in their firm (staff, in-charge, manager, (44.9 percent) partners. Subjects had an average of
partner), and whether they have previously partici- 14.1 years of auditing experience, ranging from one
pated in an audit that detected financial statement year to 38 years of experience. Thirty-six (40.4 per-
fraud committed by client management (yes or no). cent) auditors reported having directly participated in
at least one audit that eventually detected financial
statement fraud committed by client management.
Sample The sample consisted of 67 (75.3 percent) males and
22 (24.7 percent) females. Seventy-nine participants
Based on the experimental task, auditors with completed the entire DIT and had an average p-score
experience assessing the risk of fraud were deemed of 30.9 (median of 33.3). Lastly, 43 (48.3 percent)
to be the appropriate participant group. Data were subjects received the satisfying previous experience
collected in two ways. First, experimental cases were case and the other 46 (51.7 percent) received the
provided to all attendees of a southeastern state unsatisfying previous experience case.
Accounting and Auditing Conference. The confer-
ence provided updates and training to Certified
Public Accountants seeking to stay current in their Instrument
field and seeking to fulfill hours for their required
continuing education requirements. Participation The experimental case (see Appendix B) developed
was encouraged by providing raffle tickets to those for this study consists of four sections and can be
who completed the instrument. During the last completed in approximately 20 minutes. The first
session of the conference, four tickets were ran- section instructed the participants to assume the role
domly selected and prizes were distributed to win- of a supervising auditor and contained information
ners.12 Sixty-eight cases were completed and pertaining to the planning of last year’s audit. All
returned. Second, 60 experimental instruments were participants received the same information describ-
mailed to contact partners at offices (located in three ing the planning of last year’s audit. Auditors were
eastern states) of four Big Four audit firms (15 per instructed that they worked for the first time on the
firm). The contact partner distributed the instru- audit of XYZ Corporation, but it was the fourth
ments to auditor subjects of his or her choosing. year their firm had audited XYZ.16 The auditors
Once completed, the subjects returned the cases to were then presented information describing the size
the contact partner, who then mailed them to one of and firm type of XYZ (medium-sized furniture
the researchers. Of the 60 instruments sent, 45 (75.0 manufacturer). To control for competence trust,
percent) were returned, with responses from firms participants also received a fairly extensive descrip-
ranging from seven to 15.13 Combining the two tion of XYZ’s management. In this description,
Auditors’ Trust 117
TABLE III
Sample descriptive statistics
Firm type
Big 4 38 42.7
Non-Big 4 51 57.3
Position
Staff 6 6.7
In-Charge 11 12.4
Manager 32 36.0
Partner 40 44.9
Involved in audit(s) which detected financial statement fraud
Yes 36 40.4
No 53 59.6
Gender
Male 67 75.3
Female 22 24.7
Instrument version
Satisfying experience 43 48.3
Unsatisfying experience 46 51.7
auditors received numerous cues indicating that was intended to create either an overall satisfying or
management was qualified and competent to make unsatisfying experience working with XYZ’s man-
management decisions and to prepare financial agement. While we realize an auditor’s satisfaction
statements. The information also included the results with a client’s management is influenced by a variety
of a red flag checklist, which identified whether of interrelated factors (e.g. personality of manage-
certain fraud indicators are present.17 The checklist ment, behaviors of management, the environment,
contained 20 items,18 three of which were marked as etc.) we focused our manipulation on management’s
present. The main purpose of the red flag checklist behaviors. We chose this factor because we believed it
in this instrument was to control for the potential would create the most salient manipulation, and
confound of changes in XYZ’s operations (i.e. the therefore, it would lead to significantly different levels
same three items were indicated as present in of satisfaction. The overall goal of the manipulation
the current year). Finally, auditors were told that at was to create one version where auditors ‘‘enjoy’’
the end of last year’s planning phase they assessed the their interactions with management and another
risk of management fraud at 3 – ‘‘Medium Risk.’’ version where auditors are ‘‘frustrated’’ with their
This was based on a five-point scale anchored 1 – interactions with management. This was done by
‘‘Very Low Risk’’ and 5 – ‘‘Very High Risk,’’ with providing details regarding last year’s audit work.
the above-mentioned midpoint. These details were developed by the researchers, based
The second section of the instrument described the in part, on personal experiences, but mainly by uti-
results of last year’s audit. Here we manipulated the lizing previously developed job and customer satis-
auditor’s satisfaction with XYZ’s management during faction scales from the psychology and marketing
the previous audit engagement. The manipulation literature. We adapted scale items from numerous
118 William A. Kerler III and Larry N. Killough
studies (Ironson et al., 1989; King, 1960; Nicholls The third section of the instrument provided all
et al., 1998; Twery et al., 1958) and incorporated participants with the same information pertaining to
them into the results of the audit work. For example, the planning phase of the current year’s audit. Here
one of Nicholls et al.’s (1998) components of cus- the auditors were told that XYZ’s management
tomer satisfaction is timely service. It seems likely that consisted of the same individuals and that the results
a timely (untimely) response by client management to of the red flags checklist were the same as last year’s.
auditors’ request would increase (decrease) the audi- The final section of the instrument elicited responses
tors’ satisfaction with working with the client’s to the previously discussed items measuring per-
management during the audit engagement. There- ceived risk of fraud, competence of client’s man-
fore, in the satisfying (unsatisfying) audit engagement agement, satisfaction with the client’s management,
manipulation we included a phrase describing how trust in the client’s management, as well as the
management made a recommended adjustment demographic control variables. Lastly, the partici-
without hesitation (put off responding to the adjust- pants completed the DIT.
ment). The complete satisfaction manipulations are
provided below.
The satisfying prior audit engagement manipula- Results
tion states:
Descriptive statistics and correlations
During the audit work, XYZ’s management always
had a respectful attitude and never engaged in disputes
Table IV shows descriptive statistics (means and
with you. They always appeared to be well prepared
standard deviations) of the measured variables for each
for your meetings. When you were on location, you
often joined them for lunches. During your review of experimental version and in total, while Table V
their accounting records the only issue you had was shows the correlations between all measured and
that you believed they immaterially understated their manipulated variables. Pearson’s product-moment
estimate of Allowance for Bad Debt, and hence, correlation of 0.693 between ‘‘Sat’’ and ‘‘Trust’’
immaterially understated their operating expenses. provides preliminary evidence that auditors’ trust may
Although the amount was immaterial, you proposed be related to their satisfaction working with the cli-
an adjustment and XYZ’s management made it ent’s management during a prior audit engagement.
without hesitation. The end result of the audit was an Further, the Pearson’s product-moment correlation
unqualified opinion for XYZ’s financial statements. of )0.554 between ‘‘Trust’’ and ‘‘Risk’’ provides
initial evidence suggesting auditors’ trust may be re-
The unsatisfying prior audit engagement manipula-
lated to their fraud risk assessments.19 However, the
tion states:
insignificant Pearson’s product-moment correlation
During the audit work, XYZ’s management had a of 0.051 between ‘‘P-score’’ and ‘‘Trust’’ provides
hostile attitude and frequently engaged in disputes preliminary evidence that auditors’ trust may not be
with you. They never appeared to be well prepared for related to their moral reasoning.
your meetings. When you were on location, you were
never invited to join them for lunches. During your
review of their accounting records the only issue you Manipulation checks
had was that you believed they immaterially under-
stated their estimate of Allowance for Bad Debt, and
The experimental manipulation of this study is the
hence, immaterially understated their operating
auditors’ satisfaction with the client’s management
expenses. Although the amount was immaterial, you
proposed an adjustment. XYZ’s management put off during a previous audit engagement. We manipu-
responding to your proposed adjustment until you lated this as either an overall satisfying or an overall
mentioned it again a few days later. At this point they unsatisfying experience working with XYZ’s man-
refused to make the adjustment. Because your pro- agement. To test whether the manipulation was
posed adjustment did not materially affect the financial successful, we included a single test item stating that
statements, the end result of the audit was an the participant is satisfied with their experience with
unqualified opinion for XYZ’s financial statements. management and asked the participants to indicate
Auditors’ Trust 119
TABLE IV
Descriptive statistics of measured variables
Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Mean Std. Dev.
Satisfying (N = 43) 5.95 0.68 5.88 0.762 5.26 0.928 5.05 0.950 3.60 1.348
Unsatisfying (N = 46) 5.91 1.071 4.15 1.577 4.15 1.414 2.78 1.114 2.09 0.890
Combined (N = 89) 5.93 0.902 4.99 1.519 4.69 1.319 3.88 1.536 2.82 1.361
Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Mean Std. Dev.
Satisfying (N = 43) 3.19 1.200 5.49 0.798 4.842 0.734 2.84 0.485 31.08 14.331
Unsatisfying (N = 46) 5.17 1.305 3.41 1.087 3.05 0.914 3.37 0.679 30.68 14.931
Combined (N = 89) 4.21 1.599 4.42 1.413 3.917 1.222 3.11 0.647 30.89 14.537
a
For moral reasoning, N = 40 and 39 for the satisfying and unsatisfying versions, respectively.
Variables:
Version: Experimental case completed: 1 if overall satisfying experience working with the client’s management; 0 if
overall unsatisfying experience.
Comp: Subjects’ assessment of the competence of the client’s management (higher assessment, more competent). Mea-
sured on a seven-point, Likert-type scale with anchors at each point (1: strongly disagree, 2: disagree, 3: slightly disagree,
4: neither agree nor disagree, 5: slightly agree, 6: agree, and 7: strongly agree).
Sat: Subjects’ assessment of how satisfied he or she was with their experience working with the client’s management
(higher assessment, more satisfied). Measured on a seven-point, Likert-type scale with anchors at each point (1: strongly
disagree, 2: disagree, 3: slightly disagree, 4: neither agree nor disagree, 5: slightly agree, 6: agree, and 7: strongly agree).
T1–T5: See Table II.
Trust: Subjects’ trust in the client’s management (higher score, greater trust). Average score of five items: T1, T2, T3, T4
and T5.
Risk: Subjects’ assessment of the risk of management fraud for the current year’s audit. Measured on a five-point,
Likert-type scale with anchors at 1: very low risk, 3: medium risk, and 5: very high risk.
Moral reasoning: Subjects’ moral reasoning measured as participant’s p-score from the DIT.
their level of agreement on a seven-point scale. The participants indicated their level of agreement on a
mean level of agreement to this item was 4.15 and seven-point scale. The mean level of agreement to
5.88 for participants receiving the unsatisfying and this item was 5.93, which is significantly greater than
satisfying manipulation, respectively. This difference the midpoint (p < 0.001, one-tailed). We also tested
is statistically significant (p < 0.001, one-tailed) and whether there is a significant difference in partici-
suggests that our experimental manipulation suc- pants’ perception of management’s competence
cessfully created varying levels of satisfaction work- depending on the satisfaction manipulation. The
ing with XYZ’s management during the prior audit mean agreement to the competence item was 5.91
engagement.20 and 5.95 for participants receiving the unsatisfying
As explained previously, we controlled the com- and satisfying condition, respectively. These are not
petence level of management. We tested the ade- statistically different (p = 0.834, two-tailed) and
quacy of this control by including a single test item suggest our control for management competence
stating that the management is competent and was successful.21
120
TABLE V
Correlation matrix of measured and manipulated variables (n = 89 for all except for correlations with p-score where n = 79)
Version Comp Sat T1 T2 T3 T4 T5 Trust Risk P-score Gender CPA Firm Rank Fraud Years
Version 1 )0.072 0.572** 0.409** 0.752** 0.554** )0.632** 0.746** 0.751** )0.418** 0.010 0.189 0.032 0.029 )0.096 0.074 0.011
Comp 0.023 1 0.377** 0.381** 0.046 0.013 )0.257* 0.058 0.174 )0.217* )0.171 )0.111 0.033 )0.406** )0.070 )0.150 0.053
Sat 0.573** 0.389** 1 0.618** 0.649** 0.455** )0.636** 0.578** 0.702** )0.392** 0.020 0.035 0.107 )0.205 0.039 0.062 0.110
T1 0.420** 0.431** 0.628** 1 0.586** 0.453** )0.640** 0.570** 0.746** )0.435** )0.052 0.002 0.214* )0.142 )0.038 )0.095 0.056
T2 0.741** 0.101 0.633** 0.603** 1 0.670** )0.745** 0.808** 0.918** )0.447** 0.040 0.086 0.132 )0.026 0.021 0.087 0.104
T3 0.560** 0.083 0.450** 0.455** 0.663** 1 )0.595** 0.646** 0.790** )0.436** 0.003 0.157 0.122 )0.072 0.065 0.141 0.154
T4 )0.625** )0.313** )0.626** )0.652** )0.725** )0.588** 1 )0.636** )0.871** 0.483** 0.060 )0.062 0.040 0.007 0.130 )0.017 )0.014
T5 0.738** 0.111 0.580** 0.601** 0.804** 0.648** )0.633** 1 0.866** )0.490** 0.067 0.124 0.120 )0.075 0.021 )0.011 0.053
Trust 0.736** 0.244* 0.693** 0.779** 0.905** 0.792** )0.862** 0.874** 1 )0.530** 0.008 0.120 0.127 )0.088 )0.010 0.042 0.108
Risk )0.413** )0.220* )0.380** )0.490** )0.432** )0.415** 0.493** )0.511** )0.554** 1 )0.017 0.049 0.053 )0.025 0.195 0.108 0.154
P-score 0.014 )0.074 0.040 0.019 0.067 0.051 0.013 0.095 0.051 )0.037 1 0.030 )0.015 )0.003 0.022 )0.052 )0.001
Gender 0.189 )0.101 )0.004 )0.018 0.090 0.174 )0.054 0.114 0.098 0.060 0.045 1 0.123 )0.190 0.263* 0.101 0.374**
CPA 0.032 )0.022 0.108 0.184 0.140 0.115 0.039 0.116 0.117 0.051 0.045 0.123 1 )0.338** 0.479** 0.071 0.439**
Firm 0.029 )0.340** )0.189 )0.139 )0.019 )0.104 0.013 )0.061 )0.076 )0.045 )0.023 )0.190 )0.338** 1 )0.408** )0.017 )0.502**
Rank )0.080 )0.110 0.043 )0.006 0.042 0.102 0.121 0.017 0.004 0.177 0.135 0.238* 0.620** )0.386** 1 0.203 0.813**
Fraud 0.074 )0.142 0.052 )0.099 0.082 0.160 )0.024 )0.016 0.038 0.105 )0.040 0.101 0.071 )0.017 0.207 1 0.231*
Years 0.034 0.061 0.092 0.046 0.112 0.209* )0.056 0.076 0.117 0.157 0.055 0.365** 0.369** )0.514** 0.738** 0.217* 1
Panel A of Figure 3 displays the results of the Panel A: Unsatisfying experience with the client’s management during
a prior audit engagement
path analysis for auditors receiving the unsatisfying
previous experience manipulation. The results of Trust (b)
Supplemental analysis
Trust (b)
0.71
-0.55 The most interesting finding from our main analyses
p < 0.001
p < 0.001 is that auditors’ trust in a client’s management
developed after a satisfying experience working with
the client’s management during a prior audit
0.02
Satisfaction (a) p = 0.781 Fraud Risk (c) engagement does not affect their fraud risk assess-
ments. This suggests auditors are able to maintain
their professional skepticism despite their beliefs
Model Fit Indices
Chi-square 0.063
regarding management’s trustworthiness. We attri-
Moral Reasoning (d) df
p
2
0.969
bute this finding to auditors’ expertise, training, and
Chi-square / df 0.032
CFI 1.000
the renewed emphasis on maintaining professional
RMSEA 0.000
skepticism, in part brought on by the issuance of
SAS No. 99. One potential counter argument is that
Figure 4. Results of research model – path analysis
the experimental scenario was too clear cut to allow
(H2). Paths are standardized coefficients; p-values are
one-tailed when direction is hypothesized (satisfaction auditors’ perceived risk of fraud to be decreased
to trust) and two-tailed when no direction is hypothe- because of their trust in the client’s management. To
sized (trust to risk) or when the direction is in the help alleviate this potential issue, we distributed
opposite direction of that hypothesized (moral reasoning the same experimental case to Certified Public
to trust). (a)Subjects’ response to item indicating they are Accountants (CPAs) and received 83 completed
satisfied with their previous experience with the client’s cases from subjects with an average of 14.2 years of
management. Measured on a seven-point, Likert-type accounting experience (standard deviation of 9.2).
scale with anchors at each point (1: strongly disagree, 2: The current profession of this group of CPAs does
disagree, 3: slightly disagree, 4: neither agree nor dis- not include auditing; rather, their duties involve
agree, 5: slightly agree, 6: agree, and 7: strongly agree). other accounting areas (e.g. internal audit, business
(b)
Subjects’ trust in client’s management. Average score
consulting, tax, financial planning, financial services,
of five items: T1, T2, T3, T4, and T5 (defined in
regulating, and other duties performed by controllers
Table II). Measured on seven-point, Likert-type scale
described above in ‘‘a.’’ (c)Subjects’ assessment of the and private industry accountants). Being practicing
risk of management fraud for the current year’s audit. accountants and holding a CPA license, these sub-
Measured on a five-point, Likert-type scale with jects have a sufficient understanding of the auditing
anchors at 1: very low risk, 3: medium risk, and 5: very profession, auditing standards, and the complexities
high risk. (d)Subjects’ moral reasoning measured as sub- of the auditor–client relationship. As shown in Panel
jects’ p-score from the DIT. A of Figure 5, the results for the CPAs that com-
pleted the overall unsatisfying case were very similar
to that of the auditor subjects. However, as shown in
estimation. As shown in Figure 4, the model’s fit Panel B of Figure 5, for CPAs that completed the
indices are acceptable but the results of the path overall satisfying experience case, CPAs’ trust was
analysis do not support the second hypothesis. negatively and significantly related to their fraud risk
Auditors’ moral reasoning was not related to their assessments (standardized path coefficient = )0.42,
trust in that management (standardized path coef- p = 0.002, two tailed). This finding provides sup-
ficient = 0.02, p = 0.781, two-tailed). We also port that the experimental instrument was not so
tested the model separately for each prior audit clear cut so as to prohibit subjects from allowing
engagement experience manipulation group (not their trust to decrease their perceived risk of fraud.
tabulated). For both the satisfying experience The results of our first hypothesis and research
group and the unsatisfying experience group, question suggest auditors’ trust is affected by their
auditors’ moral reasoning was not significantly satisfaction with the client’s management during a
related to auditors’ trust.25 A potential explanation prior audit engagement, and this trust affects their
for this finding will be discussed in the concluding fraud risk assessments after an unsatisfying experience
section. with the client. To eliminate the possibility that
124 William A. Kerler III and Larry N. Killough
-0.01
p = 0.930
Version (a) Fraud Risk (c)
Satisfaction (a) Fraud Risk (c)
Panel B: Satisfying experience with the client’s management during a prior Figure 6. Model for supplemental analysis – Did the
audit engagement (n = 48)
experimental manipulation directly affect auditors’ fraud
Trust (b) risk assessments? (a)Experimental version, where 1 =
0.70 -0.42 overall satisfying experience with the client’s manage-
p < 0.001 p = 0.002 ment during a prior audit engagement, and, 2 = overall
unsatisfying experience. (b)Subjects’ trust in client’s man-
agement. Average score of five items: T1, T2, T3, T4,
and T5 (defined in Table II). Measured on seven-point,
Satisfaction (a) Fraud Risk (c)
Likert-type scale described above in ‘‘a.’’ (c)Subjects’
assessment of the risk of management fraud for the cur-
rent year’s audit. Measured on a five-point, Likert-type
Figure 5. Model for supplemental analysis – non-audi- scale with anchors at 1: very low risk, 3: medium risk,
tor certified public accountants. Paths are standardized and 5: very high risk.
coefficients; p-values are one-tailed when direction is
hypothesized (satisfaction to trust) and two-tailed when
no direction is hypothesized (trust to risk). (a)Subjects’ evidence that our manipulations of satisfaction did
response to item indicating they are satisfied with their not inadvertently manipulate auditors’ perceived risk
previous experience with the client’s management. of fraud.
Measured on a seven-point, Likert-type scale with an- Our first research hypothesis and research ques-
chors at each point (1: strongly disagree, 2: disagree, 3: tion examine whether trust completely mediates the
slightly disagree, 4: neither agree nor disagree, 5: slight-
effect of auditors’ satisfaction on auditors’ perceived
ly agree, 6: agree, and 7: strongly agree). (b)Subjects’
trust in client’s management. Average score of five
risk of management fraud. We also tested an alter-
items: T1, T2, T3, T4, and T5 (defined in Table II). native model, presented in Figure 7, where trust
Measured on seven-point, Likert-type scale described only partially mediates the effect of satisfaction on
above in ‘‘a.’’ (c)Subjects’ assessment of the risk of man- risk (i.e. satisfaction with a previous experience has
agement fraud for the current year’s audit. Measured on both a direct and indirect effect, through trust, on
a five-point, Likert-type scale with anchors at 1: very auditors’ perceived risk of fraud). This analysis was
low risk, 3: medium risk, and 5: very high risk. performed by estimating the new model separately
for the two groups of subjects created by the
manipulation – one path analysis for those receiving
these results are incorrect and our experimental the satisfying manipulation and one path analysis for
manipulations simply affected auditors’ perceived those receiving the unsatisfying manipulation. The
risk of fraud we estimated an alternative model, path from satisfaction to fraud risk was not significant
presented in Figure 6, where we included the when included in the models (both p > 0.650, two-
manipulated experimental version as the first variable tailed). Further, the inclusion of this path did not
in the model as opposed to auditors’ satisfaction. qualitatively affect the path coefficients reported in
Further, we included a direct path from the version the main analyses and their related p-values.
variable to auditors’ fraud risk assessments. As shown Therefore, the predicted complete mediation model
in Figure 6, the path from the version to fraud is more appropriate.
risk was insignificant (standardized path coeffi- The results of our second research hypothesis
cient = )0.01, p = 0.930, two-tailed). This provides indicate auditors’ moral reasoning was not related to
Auditors’ Trust 125
Satisfaction (a) Fraud Risk (c) Satisfaction (a) Fraud Risk (c)
Figure 8. Model for supplemental analysis of control Figure 9. Model for supplemental analysis of control
variables. (a)Subjects’ response to item indicating they variables. (a)Subjects’ response to item indicating they
are satisfied with their previous experience with the are satisfied with their previous experience with the
client’s management. Measured on a seven-point, Lik- client’s management. Measured on a seven-point, Lik-
ert-type scale with anchors at each point (1: strongly ert-type scale with anchors at each point (1: strongly
disagree, 2: disagree, 3: slightly disagree, 4: neither disagree, 2: disagree, 3: slightly disagree, 4: neither
agree nor disagree, 5: slightly agree, 6: agree, and 7: agree nor disagree, 5: slightly agree, 6: agree, and 7:
strongly agree). (b)Subjects’ trust in client’s management. strongly agree). (b)Subjects’ trust in client’s management.
Average score of five items: T1, T2, T3, T4, and T5 Average score of five items: T1, T2, T3, T4, and T5
(defined in Table II). Measured on seven-point, Likert- (defined in Table II). Measured on seven-point, Likert-
type scale described above in ‘‘a.’’ (c)Subjects’ assessment type scale described above in ‘‘a.’’ (c)Subjects’ assessment
of the risk of management fraud for the current year’s of the risk of management fraud for the current year’s
audit. Measured on a five-point, Likert-type scale with audit. Measured on a five-point, Likert-type scale with
anchors at 1: very low risk, 3: medium risk, and 5: very anchors at 1: very low risk, 3: medium risk, and 5: very
high risk. (d)Four control variables include: subjects’ high risk. (d)Subjects’ moral reasoning measured as sub-
firm (0: Non-Big Four, 1: Big Four), subjects’ years of jects’ p-score from the DIT. (e)Four control variables
auditing experience (in years), subjects’ rank in their include: subjects’ firm (0: Non-Big Four, 1: Big Four),
firm (0: staff, 1: in-charge, 2: manager, 3: partner), and subjects’ years of auditing experience (in years), subjects’
whether subjects have participated on an audit that rank in their firm (0: staff, 1: in-charge, 2: manager, 3:
detected financial statement fraud committed by client partner), and whether subjects have participated on an
management (0: no, 1: yes). audit that detected financial statement fraud committed
by client management (0: no, 1: yes).
auditors who have participated in one or more audits
in which fraud was detected became more skeptical each of the models, the path from the control variable
of another client that provided them with an to moral reasoning was not significant. This suggests
unsatisfying experience. that the results of our main path analysis testing the
Finally, we tested whether any of the same four second hypothesis are robust to the inclusion of a
demographic control variables affect the results of the variety of control variables.
main path analysis examining the second hypothesis
(Figure 4). Specifically, we performed twelve new
path analyses (for each control variable we performed Discussion
three path analyses – one utilizing the entire sample
and one for each of the manipulation groups) for the Both the press (e.g. Herrick and Barrionuevo, 2002)
model presented in Figure 9. Consistent with our and academics (e.g. Johnstone et al., 2001) have
main analysis, the path between moral reasoning and suggested that close relationships between auditors
trust was not significant in any of the twelve models and their clients (and presumably the trust that devel-
that included the control variable. Furthermore, in ops) may impair auditors’ professional skepticism.
Auditors’ Trust 127
The purpose of this study is to examine whether the press and auditing standards. It is likely auditors
auditors develop trust in a client’s management and are very aware of the potential negative conse-
whether that trust affects their audit decisions. Further, quences of trusting a client’s management (e.g.
this study examines whether auditors’ moral reasoning impaired skepticism), and they, as they should,
affects their trust. This study finds that after both an guard against developing excessive levels of trust.
overall satisfying and unsatisfying experience working Future research may wish to investigate whether
with a client’s management during a prior audit auditors’ moral reasoning affects auditors’ trust
engagement, auditors’ trust in that management is when performing other audit tasks where the
positively related to their satisfaction (i.e. higher satis- negative consequences of trusting the client may
faction is associated with higher trust and lower satis- not be so salient.
faction is associated with lower trust). This suggests that The implications of these results are important
auditors do indeed develop trust in a client’s manage- for all financial statement users. This study provides
ment and the extent of the trust depends, at least in part, evidence that, despite recent criticisms, auditors are
on how satisfied the auditors are with their previous able to maintain their professional skepticism.
experience working with the client. Further, the results Further, auditors appear to be cognizant of poten-
show that after an unsatisfying experience with a client’s tial fraud perpetrated by the client’s management,
management, auditors’ perceived risk of management even after prior satisfying experiences with the
fraud is negatively related to their trust. In other words, client and regardless of any trust the auditor may
the low level of trust developed from the unsatisfying have in that management. Standard setters and
experience is related to a higher risk of management professionals should also be interested and encour-
fraud. This suggests, as we would hope, that auditors aged by the results of this study. The results indi-
become more skeptical of a client’s management after cate auditors are following one standard designed to
that management displays untrustworthy behaviors. maintain values with which the profession was built
However, this study also finds that after an overall sat- upon – integrity, objectivity, and professional
isfying experience working with a client’s management skepticism.
during a prior audit engagement, auditors’ trust is not This study differs from previous auditing re-
related to their perceived risk of fraud. This finding is search and contributes to the literature in three
consistent with the requirement of SAS No. 99 that primary ways. First, this study is the first to
auditors ‘‘should conduct the engagement with a investigate whether auditors develop trust in a
mindset that recognizes the possibility that a material client’s management and to examine whether this
misstatement due to fraud could be present, regardless of trust affects their audit decisions. Recent criticisms
any past experience with the entity and regardless of the of the auditing profession often revolve around
auditor’s belief about management’s honesty and integrity whether close auditor–auditee relationships devel-
[emphasis added]’’ (AICPA, 2002, paragraph 13, p. 10). oped over multiple years may be impairing audi-
The extent to which auditors’ trust a client’s tors’ professional skepticism (e.g. Herrick and
management should be an ethical decision because Barrionuevo, 2002). This study is an important
excessive trust could impair auditors’ necessary first step toward examining whether auditors do
professional skepticism, which is required by their develop trust in a client’s management and also
professional standards (e.g. SAS No. 99). Based on understanding how this trust may affect their audit
this expectation and findings in prior literature, we decisions. The second contribution of this study to
predicted auditors’ moral reasoning would be the literature is the development of a measure of
negatively related to auditors’ trust (i.e. higher auditors’ trust in a client’s management that may
moral reasoning would be related to lower trust). be useful for future auditing research. For exam-
However, results of this study do not support our ple, this measure can be utilized to develop an
supposition; moral reasoning was not related to understanding of what factors affect auditors’ trust
auditors’ trust in a client’s management. We be- in a client. It can also be used to identify what
lieve the likely explanations for this finding are types of audit decisions are or are not affected by
auditors’ expertise and training, as well as the re- auditors’ trust in the client’s management. The
newed emphasis on professional skepticism in both final contribution of this study is the examination
128 William A. Kerler III and Larry N. Killough
reported using the maximum likelihood method of esti- audit of XYZ Corporation. This was the fourth year
mation and therefore not reported. your firm has audited XYZ. The previous three years’
23
Results (path coefficients and p-values) of our main audits all went smoothly. XYZ is a medium-sized
path analyses utilized to examine the two hypotheses furniture manufacturing firm. Their management
and the research question (Figures 2–4) are qualitatively consists of six individuals, all with over eight years of
the same (not tabulated) when the sample is tested
management experience at XYZ. Two are Certified
excluding the six staff-level subjects.
24
To test the second hypothesis, ten subjects needed
Public Accountants (both with over four years of
to be excluded from the analysis because they failed to auditing experience) who earned both a bachelor’s
complete the DIT. The remaining 79 auditors were in- and master’s degree in accounting. One, also a Cer-
cluded in the analysis. tified Public Accountant (two years of auditing
25
A ‘‘meaningless’’ score, or m-score, is also calculated experience), earned a bachelor’s degree in accounting
from the DIT and serves as an internal reliability check. and a Master’s of Business Administration. Two
These items ‘‘are written in a pretentious and lofty earned both a bachelor’s degree in management and a
sounding [manner], but are really meaningless’’ (Rest, Master’s of Business Administration. One earned a
1993, pp. 12–13). Rest (1993) recommends discarding a bachelor’s degree in industrial and systems engineer-
participant’s data if his/her m-score is greater than three ing and a doctorate in manufacturing systems engi-
on the three-story DIT. Results (path coefficients and neering.
p-values) of the main path analyses utilized to test the sec-
During the planning phase for last year’s audit you
ond hypothesis (Figure 4) are qualitatively the same when
we exclude auditors with m-scores greater than three.
interviewed XYZ’s management and determined
Further, a less stringent m-score cutoff value of greater that they were very competent; they had the re-
than five has recently been recommended (Rest et al., quired knowledge, skills, and training to make
1999b). Results (path coefficients and p-values) of the management decisions and to prepare financial
main path analyses utilized to test the second hypothesis statements for XYZ. You also became very familiar
(Figure 4) are qualitatively the same when we exclude with XYZ’s operations by observing and inter-
auditors with m-scores greater than five. viewing numerous employees. Your firm’s policy
during the planning phase of each year’s audit is to
Appendix A identify whether certain fraud indicators, or ‘‘red
flags,’’ are present. The presence of a red flag is an
Existing scales utilized to develop trust scale indicator of potential financial statement fraud. After
Author(s) (Year): Name of scale or name of construct becoming familiar with both the management and
being measured operations, you used this Red Flag Checklist to
• Armitage and Conner (1999): Intentions
identify which of the 20 ‘‘red flags’’ were present or
• Cook and Wall (1980): Interpersonal Trust at Work
• Craig and Gustafson (1998): Integrity
absent. You found three items to be present. The
• Doney and Cannon (1997): Trust of Supplier Firm and following page contains the Red Flag Checklist with
Trust of Salesperson all 20 items; the three items you found are listed first
• Ganesan (1994): Vendor’s Benevolence and indicated with an ‘‘X.’’
• Plank et al. (1999): Measures of Trust
• Rempel et al. (1985): Trust Scale (in close relationships)
• Rioux and Penner (2001): Motives Red flag checklist
• Rotter (1967): Interpersonal Trust Scale
Strongly Agree
Strongly Agree
1. Using the results of the red flags checklist, and your understanding of the client, how would you assess the risk of management fraud for year five’s audit?
yourself again with both the management and the
operations, you used the same checklist as last year to
identify whether 20 ‘‘red flags’’ were present or absent.
You found the same three items to be present as you did
For each of the following statements, please indicate – by circling the corresponding number – how much you agree or disagree.
last year. Below is the Red Flag Checklist with all 20
7
items; the three items you found are listed first and
indicated with an ‘‘X.’’
Agree
Agree
6
6
Red flag checklist
Slightly Agree
Slightly Agree
Check if Red flag indicators
present
5
__X__(2.) The company has a high dependence on debt
financing
__X__(3.) Management has a significant accounting-
Slightly Disagree
_____(11.) There is inadequate staffing of the accounting
Medium Risk
department
_____(12.) There is inadequate use of budgeting process
and interim financial statements
_____(13.) The internal audit department is ineffective
3
Disagree
(Please circle your risk assessment)
Strongly Disagree
1
4. I believe that XYZ Corporation’s management are thoroughly dependable people.
1 2 3 4 5 6 7
Strongly Disagree Disagree Slightly Disagree Neither Agree nor Disagree Slightly Agree Agree Strongly Agree
5. XYZ Corporation’s management will do everything possible to help me.
1 2 3 4 5 6 7
Strongly Disagree Disagree Slightly Disagree Neither Agree nor Disagree Slightly Agree Agree Strongly Agree
6. XYZ Corporation’s management are like my friends.
1 2 3 4 5 6 7
Strongly Disagree Disagree Slightly Disagree Neither Agree nor Disagree Slightly Agree Agree Strongly Agree
7. I do not think that XYZ Corporation’s management is completely open in dealing with me.
1 2 3 4 5 6 7
Strongly Disagree Disagree Slightly Disagree Neither Agree nor Disagree Slightly Agree Agree Strongly Agree
8. XYZ Corporation’s management plans to be helpful during future audits.
1 2 3 4 5 6 7
Strongly Disagree Disagree Slightly Disagree Neither Agree nor Disagree Slightly Agree Agree Strongly Agree
Auditors’ Trust
General questions
**These questions should be answered based on your actual experiences and/or opinions.**
a. What is your gender? Male Female
b. Are you a Certified Public Accountant (CPA)? Yes No
c. How many years of auditing experience do you have? __________
d. Which of the following best describes your current job position? (CIRCLE ONE)
Staff In-Charge Manager Partner
e. How many audits, on which you have directly participated, eventually detected financial statement fraud committed by client management? _________
f. Have you had previous experience assessing fraud risk? Yes No
133
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