behavioural finance in accounting.pdf

8/9/2019 behavioural finance in accounting.pdf

1/215


2/215

CONTENTS

LIST OF CONTRIBUTORS vii

REVIEWER ACKNOWLEDGMENTS ix

EDITORS COMMENTS xi

EDITORIAL POLICY AND SUBMISSION GUIDELINES xiii

PART I: ACCOUNTING BEHAVIORALRESEARCH

A STRUCTURAL EQUATION MODEL OF AUDITORS

PROFESSIONAL COMMITMENT: THE INFLUENCE OF

FIRM SIZE AND POLITICAL IDEOLOGY

John T. Sweeney, Jeffrey J. Quirin and Dann G. Fisher 3

AN ANALYSIS OF GROUP INFLUENCES ON GOING

CONCERN AUDITOR JUDGMENTS

Sunita S. Ahlawat and Timothy J. Fogarty 27

INVESTIGATING ERROR PROJECTION AMONG STATE

AUDITORS: THE IMPACT OF INTENTIONAL AND

SYSTEMATIC MISSTATEMENTS

John T. Reisch, Karen S. McKenzie and

Alan H. Friedberg 53

HOW DOES NEGATIVE SOURCE CREDIBILITY AFFECT

COMMERCIAL LENDERS DECISIONS?

Philip R. Beaulieu and Andrew J. Rosman 79

v


3/215

vi

EARNINGS MANAGEMENT AND FRAMING: THE SPECIFIC

CASE OF OBSOLETE INVENTORYMarybeth M. Murphy and Joanne P. Healy 95

THE EFFECTS OF INCENTIVE STRUCTURE AND GOAL

DIFFICULTY ON TIME PLANNING DECISIONS WITHIN A

BALANCED SCORECARD FRAMEWORK

Brad Tuttle and Mark J. Ullrich 121

THE EFFECT OF FAIRNESS IN CONTRACTING ON THECREATION OF BUDGETARY SLACK

Theresa Libby 145

PART II: PERSPECTIVES ONRESEARCH PRODUCTIVITY

A TOBIT ANALYSIS OF ACCOUNTING FACULTY

PUBLISHING PRODUCTIVITY IN AUSTRALIAN AND NEW

ZEALAND UNIVERSITIES

Brett R. Wilkinson, Chris H. Durden and

Katherine J. Wilkinson 173

PART III: METHODOLOGICAL ISSUES IN BEHAVIORAL

RESEARCH

CLASSIFICATION OF CUSTOMIZED ASSURANCESERVICES BY DECISION MAKERS: THE CASE OF

SysTrust

Philip R. Beaulieu 189


4/215


5/215

viii

John T. Sweeney School of Accounting, Information Systems

& Business Law, Washington StateUniversity, USA

Brad Tuttle Moore School of Business, University ofSouth Carolina, USA

Mark J. Ullrich(Deceased)

Graduate School of Business & Public Policy,Naval Post Graduate School, USA

Brett R. Wilkinson Hankamer School of Business, BaylorUniversity, USA

Katherine J. Wilkinson Rawls College of Business, Texas TechUniversity, USA


6/215

REVIEWER ACKNOWLEDGMENTS

The Editor and Associate Editors at AABR would like to thank the many excellent

reviewers who have volunteered their time and expertise to make this an outstand-

ing publication. Publishing quality papers in a timely manner would not be possible

without their efforts.

Elizabeth Dreike AlmerPortland State University, USA

John C. Anderson

San Diego State University, USA

Philip R. Beaulieu

University of Calgary, Canada

Jean Bedard

Northeastern University, USAJames Bierstaker

University of Massachusetts, Boston,

USA

Dennis M. Bline

Bryant College, USA

Robert H. Chenhall

Monash University, Australia

Freddie Choo

San Francisco State University, USA

Christie L. Comunale

Long Island University C.W. Post

Campus, USA

Charles Cullinan

Bryant College, USA

Elizabeth DavisBaylor University, USA

Roger DebrecenyNanyang Technological University,

Singapore

William N. Dilla

Iowa State University, USA

Alan S. Dunk

University of Tasmania, Australia

Jennifer D. GoodwinUniversity of Queensland, Australia

Glen Gray

California State University,

Northridge, USA

Heather Hermanson

Kennesaw State University, USA

Mary Callahan Hill

Kennesaw State University, USA

Karen L. Hooks

Florida Atlantic University, USA

James E. Hunton

Bentley College, USA

Mike Kirschenheiter

Columbia University, USA

Stacy KovarKansas State University, USA

ix


7/215


8/215

EDITORS COMMENTS

Welcome to Volume 6 of Advances in Accounting Behavioral Research. This

issue contains an eclectic collection of behavioral research papers that examine

several very important issues. Several of the papers focus on various aspects

of auditors decisions such as professional commitment in public accounting

firms, mitigating bias via group decision making, and appropriately using sampleinformation to estimate errors in governmental auditing. The decisions of other

professionals that use accounting information such as commercial lenders and

divisional managers are also examined. Two papers examine how accounting

information impacts the behaviors of individuals within an organization under

various incentive structures. Two other papers provide perspectives on overall

research with one developing a classification scheme for new assurance services

and the other examining factors that impact research productivity of accounting

faculty members. Overall, this is a very enlightening group of papers that provide

insight into the behaviors of various users of accounting information.

Vicky Arnold

Editor

xi


9/215

EDITORIAL POLICY AND

SUBMISSION GUIDELINES

Advances in Accounting Behavioral Research(AABR) publishes articles encom-

passing all areas of accounting that incorporate theory from and contribute new

knowledge and understanding to the fields of applied psychology, sociology,

management science, and economics. The Research Annual is primarily devotedto original empirical investigations; however, literature review papers, theoretical

analyses, and methodological contributions are welcome. AABR is receptive to

replication studies, provided they investigate important issues and are concisely

written. The Research Annual especially welcomes manuscripts that integrate

accounting issues with organizational behavior, human judgment/decision

making, and cognitive psychology.

Manuscripts will be blind-reviewed by two reviewers and an associate editor.

The recommendations of the reviewers and associate editor will be used to

determine whether to accept the paper as is, accept the paper with minor revisions,reject the paper or invite the authors to revise and resubmit the paper.

MANUSCRIPT SUBMISSION

Manuscripts should be forwarded to the editor, Vicky Arnold, at Vicky.

[email protected] e-mail. All text, tables, and figures should be in-

corporated into a word document prior to submission. The manuscript should also

include a title page containing the name and address of all authors and a conciseabstract. Also, include a separate word document with any experimental materials

or survey instruments. If you are unable to submit electronically, please forward

the manuscript along with the experimental materials to the following address:

Vicky Arnold, Editor

Advances in Accounting Behavioral Research

Department of Accounting U41A

School of Business

University of Connecticut

Storrs, CT 06269-2041, USA

xiii
mailto:[email protected]:[email protected]


10/215

xiv

References should follow the APA (American Psychological Association) stan-

dard. References should be indicated by giving (in parentheses) the authors namefollowed by the date of the journal or book; or with the date in parentheses, as in

suggested by Earley (2000).

In the text, use the form Rosman et al. (1995) where there are more than two

authors, but list all authors in the references. Quotations of more than one line

of text from cited works should be indented and citation should include the page

number of the quotation; e.g. (Dunbar, 2001, p. 56).

Citations for all articles referenced in the text of the manuscript should be shown

in alphabetical order in the reference list at the end of the manuscript. Only articles

referenced in the text should be included in the reference list. Format for references

is as follows:

For Journals

Dunn, C. L., & Gerard, G. J. (2001). Auditor efficiency and effectiveness with

diagrammatic and linguistic conceptual model representations. International

Journal of Accounting Information Systems,2(3), 140.

For Books

Ashton, R. H., & Ashton, A. H. (1995).Judgment and decision-making research

in accounting and auditing. New York, NY: Cambridge University Press.

For a Thesis

Smedley, G. A. (2001). The effects of optimization on cognitive skill acquisitionfrom intelligent decision aids. Unpublished doctoral dissertation, University.

For a Working Paper

Thorne, L., Massey, D. W., & Magnan, M. (2000). Insights into selection-

socialization in the audit profession: An examination of the moral reasoning of

public accountants in the United States and Canada. Working paper: York Univer-

sity, North York, Ontario.


11/215

xv

For Papers From Conference Proceedings, Chapters From Book, etc.

Messier, W. F. (1995). Research in and development of audit decision aids. In:

R. H. Ashton & A. H. Ashton (Eds),Judgment and Decision Making in Accounting

and Auditing(207230). New York: Cambridge University Press.


12/215

A STRUCTURAL EQUATION MODEL

OF AUDITORS PROFESSIONAL

COMMITMENT: THE INFLUENCE OF

FIRM SIZE AND POLITICAL IDEOLOGY

John T. Sweeney, Jeffrey J. Quirin and Dann G. Fisher

ABSTRACT

This study models auditors professional commitment as the product of

socialization forces operating within the public accounting profession. The

results of a structural equation analysis from a sample of 349 auditorsrepresenting international, national and regional firms indicate that firm size

is inversely related to professional commitment. Furthermore, the findings

indicate that a strong relationship exists between an auditors political

ideology and professional commitment. Politically conservative auditors,

reflecting the dominant ideology in public accounting, reported significantly

higher professional commitment than politically liberal auditors.

INTRODUCTION

The accounting scandals that have marked the dawn of the 21st century, such

as Enron, MCI, and Global Crossing, have damaged the credibility of the audit

report and the reputation of the public accounting industry. Perhaps more than

ever, commitment to the ideals and standards of the auditing profession is vital


Advances in Accounting Behavioral Research, Volume 6, 325

Copyright 2003 by Elsevier Ltd.

All rights of reproduction in any form reserved

ISSN: 1474-7979/doi:10.1016/S1474-7979(03)06001-0

3


13/215

4 JOHN T. SWEENEY, JEFFREY J. QUIRIN AND DANN G. FISHER

to maintaining stakeholders confidence in the integrity of the audit report and in

the reliability of financial statement representations. The purpose of this researcheffort is to develop and test a comprehensive model of auditors professional

commitment with the objective of furthering our understanding of this attitude so

essential to maintaining public trust.

A primary contribution of this study to the auditing research literature is

the inclusion of variables not previously considered in models of professional

commitment, namely audit firm size and political ideology. Firm size proxies

for differences in organizational culture (Pratt & Beaulieu, 1992) and the results

indicate that auditors professional commitment is directly and inversely affected

by firm size. As a profession, the culture of public accounting is predominately

politically conservative (Sweeney, 1995).In this study, political ideology is mod-

eled as a socializing variable. The findings indicate that auditors whose ideology

is consistent with the prevailing conservative doctrine are more committed to the

profession than auditors who are politically liberal.

The results of this study have important implications for the public accounting

profession. First, the inverse relationship between firm size and professional com-

mitment is cause for concern, as larger firms and especially the international firms,

dominate the market for audit services. Larger firms also dominate and increasingly

emphasize the more lucrative consulting and non-audit service areas. Perhaps as

a result of the metamorphosis from traditional accounting firms to diverse serviceorganizations, auditors from larger firms may have lessened their identification

with and commitment to the ideals of the accounting profession. Second, the model

indicates that political ideology directly influences commitment, perhaps due to

conservative auditors more readily embracing the conservative values traditionally

associated with the profession. Political ideology also influences perceptions of

success in public accounting, as conservative auditors report a significantly higher

probability of attaining partnership in their firms than liberal auditors.

This paper proceeds in the following manner. The next section reviews the

literature relevant to the development of a model of professional commitment.Hypotheses are then advanced, followed by sections discussing the methodology

and analysis. The final section consists of a summary and discussion.

LITERATURE REVIEW AND HYPOTHESES

DEVELOPMENT

Professional commitment, representing the extent to which one identifies and is

willing to exert effort in support of a profession (Aranya et al., 1981; Aranya &Ferris, 1984),has been conceptualized as a socialization process where emphasis


14/215

A Structural Equation Model of Auditors Professional Commitment 5

is given to cultivating professional values (Jeffery & Weatherholt, 1996; Larson,

1977). For the auditing profession, these values include honoring the public inter-est, independence, integrity, and objectivity. An assumption underlying the attitude

of professional commitment is that the stronger an individuals identification with

and loyalty to the public accounting profession, the less likely he or she will sub-

rogate professional responsibilities (Farmer, 1993). A strong commitment to the

ideals of the profession is considered a prerequisite for independent professional

judgments (Aranya et al., 1981; Gaffney et al., 1993).

The development of auditors professional commitment is generally assumed to

precede the development of their organizational commitment (Aranya et al., 1982;

Aranya & Ferris, 1984). Anticipatory professional socialization often begins in

college, when the choice of accounting as an undergraduate major and career

is made, while organizational commitment commences upon entrance to the

firm (Fogerty, 1992).Early conceptualizations of the professional-organizational

dynamic viewed the two constructs in conflict, as the demands of the employing

bureaucracy were perceived to be in competition with professional loyalties

(Sorenson & Sorenson, 1974). The conflict between organizational and profes-

sional socialization occurs when behaviors concordant with organizational norms

and goals are inconsistent with the professions code of conduct. Violation of

organizational norms may result in internal sanctions levied against the auditor.

Violation of professional standards, such as Arthur Andersens obstructionof justice in the Enron audit, can result not only in penalties levied against

the perpetrator and his or her firm but may also diminish the prestige of the

auditing profession and the publics perception of the assurance provided by the

audit report.

More recent research has not viewed organizational and professional commit-

ment as inherently incompatible, finding instead a positive association between

the two constructs (Aranya et al., 1981, 1982). When the professional and organi-

zational commitments of public accountants are in conflict, however, researchers

have found lower job satisfaction and higher turnover intentions (Aranya & Ferris,1984; Sorenson & Sorenson, 1974). In order to preserve the role of the audit

function in maintaining capital markets, it is essential that auditors commitment

to the profession take priority over loyalties to the organization (Schroeder &

Imdieke, 1977).1

Prior research has generally focused on the consequences of professional

commitment and has consistently found a significant association with important

outcome variables. Professional commitment has had a positive influence on

public accountants job satisfaction (Aranya et al., 1982; Bline et al., 1991)and

organizational commitment (Aranya et al., 1982; Aranya & Ferris, 1984) anda negative association with turnover/migration tendencies (Aranya et al., 1982;


15/215


Bline et al., 1991) and organizational-professional conflict (Aranya & Ferris,

1984). Professional commitment has also been associated with auditors judgmentregarding client retention decisions (Farmer, 1993).

A Model of Auditors Professional Commitment

The objective of this research is to model auditors professional commitment. The

changing landscape and demographics of the accounting profession suggest that

an understanding of the socializing factors leading to high levels of professional

commitment is needed.Siegal et al. (1991, p. 58)define professional socialization

as the acquisition of the values, attitudes, skills and knowledge of a professionalsubculture.Fogerty (1992)contends that socialization within public accounting

organizations is to a large extent a coercive process, as new initiates are inculcated

to adopt the values of the dominant culture. Our model of professional commitment

examines two socialization factors not previously considered in prior published

research: firm size and political ideology.

Firm Size

Pratt and Beaulieu (1992)asserted that differences in firm size proxy for differ-

ences in culture. They concluded that larger firms have more rigid control systemsthan smaller firms, resulting in the large firms being more structured and mecha-

nistic than the smaller firms. Wheeler et al. (1987) found that the nature of the work

environment, the organizational structure, performance evaluations, compensation

and promotion procedures in large firms differed substantially from those of

smaller firms.Goetz et al. (1991)contended that the more structured and bureau-

cratic environment of larger firms resulted in less individual voice in determining

rules of conduct within the firm.Ponemon (1992)claims that such a strong firm

culture effectively results in the organization weeding out those persons who fail

to conform.These factors imply that the loyalty of accountants in the larger firms must

be first to the organization and then to the profession. Goetz et al. (1991)

support this premise and assert that because smaller firms have less stand-alone

credibility than do larger firms, practitioners in the smaller firms need the

profession more than practitioners in the larger firms. Larger firms are more

visible and prestigious, endowing upon their members an identity separate from

the profession. This suggests that auditors in smaller firms may identify more

readily with the profession, vis-a-vis the organization, than auditors in larger firms

and correspondingly develop a greater sense of commitment to the profession.

H1. Firm size is inversely related to auditors professional commitment.


16/215


Political Ideology

Socialization encourages persons to become similar to their profession, not onlyas it is embodied by other organizational members, but also as it is defined by

the professions espoused ideals (Fogerty, 1992, p. 139). This description of

the socialization process implies the existence of a prototypic public accountant

embodying desirable characteristics, values and attitudes. The more effective the

socialization processes, the greater the correspondence between the prototype

and the professional member. Some values and attitudes (i.e. commitment,

identification) may be more readily influenced and inculcated by the social-

ization process than others (i.e. religious preferences). It is also possible that

some prototypic characteristics are not amendable by socialization (i.e. gender,

race).

A particularly appropriate theory for examining the influence of prototypes

on socialization processes in the auditing profession is self-categorization theory

(SCT) (Chatman et al., 1998; Hogg & Terry, 2000; Tajfel & Turner, 1985).2 SCT

focuses on the process whereby individuals define their self-concept in relation

to their membership in social groups. Prototype-based comparisons, whereby

social categorization of the individual into favorable in-group or unfavorable

out-group membership occurs, lies at the heart of SCT processes (Hogg &

Terry, 2000, p. 122). Prototypes are cognitive representations of the defining

and stereotypical features of in-groups, embodying exemplary or ideal typesand capturing characteristics that differentiate them from other groups. These

characteristics include demographic attributes, behaviors, attitudes and values.

Critical to the notion of prototypes is that they accentuate similarities within and

differences between groups (Hogg & Terry, 2000). For example, because the pro-

totypical partner in public accounting is male, an in-group characteristic may be

masculinity and an out-group characteristic femininity (Maupin, 1993; Maupin &

Lehman, 1994).3

Prototype-based self-categorization is relevant for modeling professional

commitment as a socialization process directed towards cultivating professionalvalues (Jeffery & Weatherholt, 1996; Larson, 1977) for several reasons. First, in-

group members, reflecting prototypic characteristics, are more likely to cooperate

with each other and to compete with out-group members (Chatman et al., 1998).

Second, in-group members are likely to receive favorable treatment compared to

out-group members (Ashforth & Mael, 1989). This favoritism may be reflected

in work assignments, performance evaluations, receipt of voluntary mentoring, or

through informal signals of preference relative to out-group members. As a result,

in-group members are likely to maintain more favorable attitudes towards their

profession and be more readily socialized than out-group members. Third, SCTimplies that a prototypically homogeneous audit profession is likely to develop,


17/215


which may facilitate socialization by reducing uncertainty regarding appropriate

attitudes and behaviors (Hogg & Terry, 2000).Chatman (1991)utilized a person-organization fit approach, defined as the con-

gruence between organizational and individual values, in examining socialization

processes in public accounting. She found that socialization is facilitated by the

extent that new auditors possess or inculcate values similar to the prototypical

organizational values. Recruits whose values were aligned with the prevalent

organizational values had greater satisfaction and lower turnover than recruits

who maintained dissimilar values.

Kanter (1977) contends that in-group conformity is a prerequisite for ad-

vancement in organizations and that promotion largely depends upon presenting

political views as well as sex-role characteristics that are similar to the dominant

or prototypic upper-level managers. Sweeney and Fisher (1999) propose that

conservative political ideology represents a normative set of shared values in

public accounting and is an important socialization factor. In his analysis of the

influence of social class on political orientation,Burns (1992)identified several

dimensions collectively predictive of conservative ideology. The dimensions

identified as explaining a conservative/Republican political orientation included

engaging in mental (versus manual) labor, self-employment, individualistic

(versus collective) economic orientation, white race and male.4 These dimensions

are generally descriptive of the prototypic audit firm partner.There has been little research to date examining the political orientation of

public accountants. In a broad sample of public accountants, Sweeney (1995)

found that approximately 80% identified themselves as politically conservative.

Further testimony to the conservative orientation of public accounting is reflected

in political party contributions over the last election cycle (19992000). The

combined contributions of the American Institute of Certified Public Accountants

and the Big 5 international firms to the conservatively oriented Republican Party

($3,358,746) were approximately twice those to the more liberal Democratic

Party ($1,708,220) (FECInfo, 2001).If political ideology is an important socializing variable in public accounting,

then conservative auditors are most likely to inculcate and embrace the prototypic

politically conservative values of the profession. Politically liberal auditors may

feel disenfranchised by the conservative orientation of public accounting and have

difficulty identifying with the dominant political values. As a result, it is likely that

politically conservative auditors would be more readily socialized, and therefore

be more committed to the profession, than their politically liberal counterparts.

H2. Politically conservative auditors willhave greater professional commitmentthan politically liberal auditors.


18/215


Control Paths

Prior research has documented that partners in public accounting are typically

male (Hooks & Cheramy, 1994; Hull & Umansky, 1997) and, on average,

have developed to the conventional level of moral reasoning (Sweeney, 1995).

Researchers have suggested that masculinity (Maupin, 1993; Maupin & Lehman,

1994) and conventional moral reasoning (Ponemon, 1992) represent prototypes

in public accounting. Since the influence of both gender and moral reasoning on

professional commitment has been examined in prior research, these variables

are included as control paths in the model of professional commitment.

Although the literature suggests that gender barriers in public accounting may

preclude women from attaining the same level of commitment to the profession as

men (Maupin, 1993; Maupin & Lehman, 1994),the results of empirical research

have been equivocal.Gaffney et al. (1993)found that family obligations increased

the professional commitment of men in public accounting but had no effect on

womens professional commitment. Street et al. (1993), after controlling for

positional level, did not find a difference in professional commitment between

female and male public accountants.

Covaleski et al. (1998) contend that although women may have broken the

glass ceiling to attaining partnership in Big 6 firms, there is still a paucity of

high-level female partners. Women who are unable or unwilling to adapt mascu-line characteristics required by the male-dominated culture of public accounting

may encounter obstacles in making partner (Maupin & Lehman, 1994). Given

the predominance of the male partners and the difficulties that woman may

encounter in adopting in-group male qualities, women in public accounting may

represent an out-group and have correspondingly less professional commitment

than men.

H3. Male auditors will have greater professional commitment than will female

auditors.Ethics researchers in accounting have consistently found that the ethical devel-

opment of auditors, as measured by the P score of the Defining Issues Test

(DIT) (Rest, 1986, 1993), most commonly reflected conventional reasoning

and was inversely related to positional level (Lampe & Finn, 1992; Ponemon

& Gabhart, 1993; Shaub, 1994). This result seemingly contradicts Kohlbergs

(1969) moral development theory, which holds that development is sequential

and progressive but not regressive. Ponemon (1992)contended that the inverse

relationship between P scores and rank in public accounting organizations was

the result of a selection-socialization process whereby firms prefer to hire andthen promote individuals with a shared set of ethical values and beliefs. He found


19/215


that conventional reasoning auditors, as measured by DIT P scores, were more

likely to be favorably evaluated and promoted and less likely to turnover thanprincipled reasoning auditors.Ponemon (1992, p. 244)asserted that individuals

with too high a level of ethical reasoning may experience difficulty progressing

to the upper echelons in the accounting firms formal hierarchy. In other words,

accountants who reason at a conventional level are most likely to accept, embrace,

and support the prototypical norms of the firm and the profession, increasing

their acceptance within the organization and opportunities for promotion. Thus,

it appears that conventional reasoning, as opposed to higher order principled

reasoning, is representative of the ethical value prototype of the audit profession.

Dwyer et al. (2000)examined the relationship between practicing accountants

professional commitment and DIT P scores. Their results suggested that ac-

countants ethical development influenced their interpretation of the professional

commitment construct, although the authors did not indicate a directional

relationship.Shaub et al. (1993) found that auditors professional commitment

was influenced by their ethical orientation, with ethical idealism positively

related to and ethical relativism negatively related to commitment. Jeffery and

Weatherholt (1996)posited a link between an accountants ethical development,

as measured by DITPscores, and his or her professional commitment. Consistent

withPonemons (1992)selection-socialization hypothesis, Jeffery and Weather-

holt found that conventional reasoning accountants had higher professionalcommitment than principled reasoning accountants.

H4. Professional commitment will be inversely related to auditors ethical

development, as measured by theP score of the DIT.

The relationship between positional level and professional commitment has

also been examined in prior research and is included as a control path in our

model. Advancement within public accounting organizations is largely a result

of socialization processes, whereby individuals who reflect the dominant culture

and values of the organization are more likely to be promoted ( Fogerty, 1992;Ponemon, 1992; Pratt & Beaulieu, 1992). Early research on commitment

in public accounting organizations (Schroeder & Imdieke, 1977; Sorenson,

1967; Sorenson & Sorenson, 1974) suggested that partners were more organi-

zationally oriented and less professionally committed than were staff members.

More recent research has not supported this contention. These studies instead

found that professional commitment is positively associated with rank in the firm

(Adler & Aranya, 1984; Aranya et al., 1981; Aranya & Ferris, 1984; Jeffery &

Weatherholt, 1996; Norris & Niebuhr, 1983).

Goetz et al. (1991)speculated that experience and tenure heighten professionalcommitment. This is consistent with defining professional commitment as a


20/215


socialization process. If the socialization process is successful, then it follows that

those who have been in the profession the longest should display the strongestcommitment. Turnover-survivorship processes would also suggest that profes-

sional commitment should be stronger at higher positional levels. Individuals who

are more committed to the profession would be more likely to remain, which may

explain the inverse relationship between professional commitment and turnover

(Aranya et al., 1982; Bline et al., 1991).

H5. Professional commitment of auditors will increase with rank in the firm.

Hypothesis 3 and Hypothesis 5 posit that gender and rank will have an effect

on professional commitment. Prior studies involving public accountants have

indicated a strong relationship between gender and rank, with females being

underrepresented at higher ranks (Collins, 1993; Hooks & Cheramy, 1994;

Maupin, 1993; Maupin & Lehman, 1994; Sweeney, 1995). As a result, it is

necessary to control for the influence of positional level when assessing the

relationship between gender and professional commitment.

Prior research assessing the ethical development of public accountants have

generally found the DITPscores of females to be higher than the scores of males

(Bernardi & Arnold, 1997; Enyon et al., 1997; Shaub, 1994; Sweeney, 1995).

The gender effect onP scores appears to hold regardless of firm size. As a result,

the ethical development of female auditors is expected, on average, to be moreadvanced than that of male auditors. Therefore, the influence of gender must be

controlled for in assessing the effect of ethical development, as measured by DIT

Pscores, on auditors professional commitment (H4).

Sweeney and Fisher (1998, 1999) and Fisher and Sweeney (2002) contend

that the DIT contains an imbedded political content biasing the measurement of

test-takers ethical development. AlthoughRest et al. (1999)dispute this claim,

they concede that as much as 40% of the variance in DIT P scores is explained

by political ideology. A priori, the political content of the DIT will result in an

upward bias in theP scores of politically liberal auditors and a downward bias intheP scores of politically conservative auditors (Sweeney & Fisher, 1998, 1999).

Therefore, the influence of political ideology must be controlled in assessing the

effect of ethical development on professional commitment (H4).5

In summary, we hypothesize that auditors professional commitment is directly

impacted by the following variables: firm size (H1), political ideology (H2),

gender (H3), ethical development, as measured by DIT P scores (H4), and

positional level (H5). The model of professional commitment also includes the

following control paths: positional level on gender, gender on ethical development,

and political ideology on DITP scores.Figure 1presents our model of auditorsprofessional commitment.


21/215


22/215


Table 1. Descriptive Statistics for Sample.

Position Firm Size Totals

Small Medium Large

Staff 23 22 55 100

Senior 15 10 63 88

Supervisor 11 8 19 38

Manager 10 14 39 63

Partner 29 9 22 60

Totals 88 63 198 349

Males: 230 Liberals: 63 Average age: 30.3 years (S.D. = 8.1)Females: 119 Conservatives: 286 Average experience: 7.3 years (S.D. = 7.1)

Professional PScore

Commitment

Mean: 75.51 42.14

S.D.: 11.73 12.53

Range: 41103 8.373.3

was voluntary and subjects were assured of anonymity. Participants provided

demographic data but did not otherwise identify themselves.

A total of 383 research instruments were received by the researchers, resulting in

a response rate of approximately 72%. From this initial sample, 27 subjects failed

to pass the internal reliability checks of the DIT, two subjects did not indicate their

political ideology, and five did not complete the professional commitment section.

These respondents were purged from the sample. The final sample consisted of a

cross-section of 349 auditors, of which 66% were male and 82% were politically

conservative. Descriptive statistics for the sample are given in Table 1.

Measures

Professional commitment (PC) was measured with the 15-item scale adapted by

Aranya et al. (1981) from the Porter et al. (1974) organizational commitment

questionnaire. This scale has been utilized extensively by accounting researchers

to measure professional commitment (Aranya et al., 1982; Gaffney et al., 1993;

Harrell et al., 1986; Jeffery & Weatherholt, 1996; Street et al., 1993).Researchershave indicated that the scale has good internal consistency, with Cronbachs


23/215


alpha reported in the high 0.80s (Aranya et al., 1981; Aranya & Ferris, 1984;

Bline et al., 1991).Bline et al. (1991), in an extensive examination of the psychometric properties

of the professional commitment questionnaire, report that the scale measures a

construct distinct from organizational commitment. Their tests indicated that the

professional commitment scale has adequate reliability and validity. Furthermore,

the professional commitment construct correlated positively with job satisfaction

and negatively with intent to leave the profession. Other accounting researchers

have reported negative correlations between the professional commitment scale

and organizational-professional conflict (Aranya et al., 1981; Harrell et al., 1986)

and positive correlations with favorable work attitudes in public accounting

(Aranya et al., 1982).6

Ethical development was measured by the sample respondents P score

from the 6-story DIT (Rest, 1979, 1986, 1993). The P score is a continuous

measure, ranging from 0 to 95, reflecting the relative importance a subject gives

to principled moral reasoning in resolving moral dilemmas (Rest et al., 1997,

p. 498). Rest (1993) reports an average P score of 45 for college graduates,

although accounting researchers have generally found that public accountants

score lower than adults from the general population at similar educational levels

(Ponemon, 1992; Sweeney, 1995).Rest (1986, pp. 176179)contends that theP

score correlates most strongly with educational level but only weakly with gender,intelligence and ethnic background. Gender, however, appears to have a stronger

influence on accountants P scores than it does in the general population, with

females attaining significantly higher scores (Bernardi & Arnold, 1997; Enyon

et al., 1997; Shaub, 1994; Sweeney, 1995).

The DIT has been subjected to extensive reliability and validity tests with

generally good results (Rest, 1979, 1986; Rest et al., 1999). Some researchers

(Emler et al., 1983), however, contend that the DIT contains a political bias. In

studies with accounting subjects,Sweeney and Fisher (1998, 1999)found that the

DIT contained an imbedded political content that tended to overstate the scoresof political liberals and to understate the scores of political conservatives. They

suggest that researchers utilizing the DIT control for subjects political ideology in

order to more clearly interpret the relationship between P scores and the variable

of interest.

Subjects indicated their political ideology in response to the following ques-

tion: Regarding important social and political issues, would you classify your

opinion or perspective as primarily conservative or liberal? Forcing subjects to

identify their positions asprimarilyliberal or conservative is consistent with prior

research (Sweeney, 1995)and eliminates the ambiguity of a political moderateclassification.


24/215


EMPIRICAL RESULTS

Correlations

Table 2 presents correlation coefficients for professional commitment and

variables of interest. Subjects professional commitment is negatively associated

with the size of their respective firm and positively associated with their positional

level. Political ideology and gender are associated with professional commitment

and DIT P scores. Political ideology is not correlated with gender, position, or

firm size. The significant association between gender and position results from the

underrepresentation of female auditors at thehigher ranks. Theassociation betweenfirm size and position is an apparent artifact of the non-random sample selection

process.

Structural Equation Modeling

Structural equation modeling was used to evaluate the proposed hypotheses. The

structural equation model utilized to test the hypotheses corresponds to the model

inFig. 1. Each link between the variables in Fig. 1 has a path coefficient that

measures the impact of the antecedent variable in explaining the variance in the

outcome variable. For example, the path coefficient for the link between political

ideology and P score indicates the increase in P score, measured in standard

deviations, associated with a one standard deviation increase in political ideology.

The goal of structural equation modeling is to evaluate whether associations

proposed in theory, or in prior research, fit the present data set. Evidence of proper

fit is provided by various other fit indices. However, measures of proper fit can

Table 2. Correlation Matrix.

Professional Firm Political PScore (4) Position (5) Gender (6)

Commitment (1) Size (2) Ideology (3)

(1) 1.000

(2) 0.246** 1.000

(3) 0.132** 0.087 1.000

(4) 0.017 0.080 0.194** 1.000

(5) 0.234** 0.146** 0.046 0.105* 1.000

(6) 0.116* 0.054 0.055 0.205** 0.353** 1.000

N= 349.p


25/215


be problematic since several of the commonly used fit indices are sample size

dependent. For this reason, multiple measures of overall model fit are reported inthis study.

The Normed Fit Index (NFI) (Bentler & Bonett, 1980) has an index range

from 0 to 1, with values over 0.9 indicating a good fit. This index may be viewed

as the percentage of observed-measure covariation explained by a given model.

The disadvantage of the NFI is that it can underestimate goodness-of-fit in small

samples.Bentlers (1990)revised Normed Comparative Fit Index (CFI) is based

upon the Bentler and Bonett (1980) NFI but with a correction for sample-size

dependency. CFI values always lie between 0 and 1, with values over 0.9 indicating

a relatively good fit (Bentler, 1990). Finally, the Adjusted Goodness of Fit Index

Fig. 2. Structural Equation Model with Path Coefficients.


26/215


Table 3. Structural Equation Modeling Results.

Dependent Independent Associated Path t-Value p-ValueVariable Variable Hypothesis Coefficient

PC Firm size H1 0.236 4.65 0.001

Political ideology H2 0.154 2.98 0.002

Gender H3 0.042 0.76 0.224

PScore H4 0.059 1.13 0.132

Position H5 0.184 3.43 0.001

Position Gender 0.353 7.04 0.001

PScore Gender 0.195 3.78 0.001

Political ideology 0.183 3.55 0.001

N= 349. PC = Professional Commitment.

(AGFI), devised byJoreskog and Sorbom (1984),is an additional fit index that

ranges from 0 to 1, with values above 0.9 indicating acceptable fit. Specifically,

in addition to the traditional Goodness of Fit Index (GFI), the Adjusted Goodness

of Fit Index (AGFI), the Normed Fit Index (NFI), and the Comparative Fit Index

(CFI) are reported in this study. This lends some assurance that the measures of

fit produced are not spurious.

Figurative depictions of the results of the structural equation analysis arepresented in Fig. 2. With GFI, AGFI, NFI, and CFI values exceeding 0.9 in

all instances, the theoretical model appears to provide a very good fit with the

dataset.

Tabular results of the structural equation analysis including a listing of each

hypothesis and its corresponding path coefficient are presented in Table 3.

Consistent with the relatively high model fit indices, results inTable 3indicate

that an overwhelming majority of the associations hypothesized in the current

study and suggested by prior literature were significant, providing further support

for the proposed theoretical model of professional commitment.

Tests of Hypotheses

Hypothesis 1 predicts a negative relationship between firm size and professional

commitment. The path coefficient for this theoretical link is 0.236 and is

significant at the p


27/215


tailed t-test indicated that the professional commitment of politically con-

servative auditors was higher than that of liberal auditors (76.2 vs. 72.2;p


28/215


Additional Analysis

Table 4 examines the influence of the significant main effects on auditors

professional commitment, partitioned by firm size, position and political ideology.

Professional commitment scores are highest in the regional firms and, as expected,

at the partner level. Senior auditors in regional and national firms also demonstrate

relatively high commitment. The influence of political ideology is evident, as

Table 4. Summary of Professional Commitment Levels By Political Ideology

and Position for Each Firm Size.

Firm Size n Mean PC Position N Mean PC Political Ideology n Mean PC

Small 88 80.02 Staff 23 75.57 Conservative 17 77.06

Liberal 6 71.33

Senior 15 80.20 Conservative 11 81.27

Liberal 4 77.25

Supervisor 11 77.91 Conservative 9 80.11

Liberal 2 68.00

Manager 10 76.90 Conservative 8 77.13

Liberal 2 76.00

Partner 29 85.34 Conservative 21 86.38

Liberal 8 82.63

Regional 63 76.44 Staff 22 76.64 Conservative 16 78.31

Liberal 6 72.17


Liberal 1 93.00


Liberal 0


Liberal 1 86.00

Partner 9 80.44 Conservative 8 79.25Liberal 1 90.00

Big 6 198 73.21 Staff 55 73.47 Conservative 48 74.13

Liberal 7 69.00


Liberal 15 66.00


Liberal 2 61.50


Liberal 7 67.29

Partner 22 85.55 Conservative 21 85.10

Liberal 1 95.00


29/215


conservative auditors have higher commitment than liberal auditors for every cell

containing at least two liberal auditors.An objective of socialization is to insure that management promotes those

individuals who reflect the culture and values of the organization (Fogerty, 1992;

Kanter, 1977; Ponemon, 1992). If conservative ideology is a strongly held value

in the culture of public accounting, then politically conservative auditors should

perceive greater opportunities for advancement than politically liberal auditors.

To provide further evidence of the socializing influence of political ideology

in public accounting, subjects who were not partners were asked to respond

to the following question: Please indicate what you believe are your chances

(likelihood) of making partner in your present firm. The Likert response scale for

the question ranged from 1 (very low) to 7 (very high). Conservative auditors, on

average, perceived their opportunities for advancement to partner as significantly

greater than liberal auditors (3.68 vs. 2.96; p


30/215


The process of socialization implies that membership within the dominant

group conveys benefits. Feelings of inclusion or exclusion from the controllinggroup are likely manifested in important job-related attitudes, such as professional

commitment (Chatman, 1991; Ponemon, 1992). A major contribution of this study

to the research literature is the inclusion of political ideology as a socializing force

in public accounting organizations. Politically conservative auditors, representing

the dominant ideology, had a greater commitment to the profession than did

liberal auditors.

The public accounting profession has, in recent years, increasingly emphasized

the recruitment of under-represented socio-economic groups; however, a truly

diverse workplace is open to disparate opinions and viewpoints. Although

public accountants have traded their green eyeshades for laptop computers, they

appear to still embrace a politically conservative ideology. Firm management

can benefit from this research in understanding that the public accounting

profession may be so doctrinally conservative that it could be effectively

excluding a significant segment of society, political liberals, whose perspectives

may be valuable in understanding a rapidly changing world. Efforts directed

towards changing the traditionally conservative image of the public account-

ing profession may be beneficial in attracting new members with alternative

viewpoints.

Although male auditors, on average, reported a stronger commitment to theprofession than female auditors, gender was not a significant direct factor in the

model after controlling for the influence of positional level. Gender, however,

did have an indirect impact on professional commitment. After controlling

for political ideology and gender, the relationship between auditors ethical

development and professional commitment previously reported was not supported

(Jeffery & Weatherholt, 1996).

The limitations of this research need to be recognized. First, the sample

selection process was non-random, which may limit generalizability. Second, as

the data were drawn from survey questionnaires, reliability is dependent upon thetruthful responses of the participants. Third, the dichotomous measure of political

ideology did not reflect the intensity of the subjects commitment to conservative

or liberal positions. A more comprehensive measure may better contribute to our

understanding of the impact of political ideology as a socializing force in public

accounting organizations.

Potential extensions of this research include examining further the impact of

political ideology in accounting organizations. The relationship between political

ideology and important job-related attitudes, such as satisfaction, organizational

commitment and turnover intentions, may advance our understanding of profes-sional socialization. Political ideology may also affect other important processes

in public accounting, such as recruitment and audit team dynamics.


31/215


NOTES

1. Former Securities and Exchange (SEC) Commissioner Arthur Levitt questionedwhether the expansion into more lucrative services compromises the traditional auditfunction (Covaleski, 1999). Suggesting that the audit has merely become a conduit forselling other services, Levitt contends that auditors may not be sufficiently committed tosocietal expectations and professional standards.

2. SCT is an extension of social identity theory (SIT) (Ashforth & Mael, 1989; Brown,2000; Tajfel & Turner, 1985).SIT maintains that ones social identity is derived primarilyfrom group membership, that people strive to maintain a positive identity, and that thispositive identity largely results from favorable comparisons between relevant in-groupsand out-groups (Ashforth & Mael, 1989).

3. Fogerty (2000, p. 13) described the socializing influence of prototypes in publicaccounting firms when he stated: Experienced organizational members selectively providereinforcement, communicate the approved range for action, and serve as examples ofachievement.

4. An individualist orientation supports the notion of capitalism in viewing people asindependent economic actors, as opposed to a collectivist orientation that is more alignedwith a socialist perspective (Burns, 1992, p. 352).

5. After controlling for political ideology and gender, Sweeney (1995)did not find asignificant relationship between rank and DITP scores. Therefore, we do not control forthe influence of rank on ethical development.

6. Dwyer et al. (2000)examined the dimensionality of theAranya et al. (1981)pro-

fessional commitment scale with a broad sample of practicing accountants and concludedthat the 15-item scale could be parsimoniously reduced to a five-item measure. In light ofthis research, we performed a principal components, orthogonal rotation factor analysis ofthe instrument. Results of the factor analysis indicated that 14 of the 15 items possessedloadings of 0.40 or greater on a single factor. Item 7 of the instrument, which possessed aloading of 0.15, was the lone item not contributing to the factor. The resulting eigenvaluefor the 14-item factor was 5.49. The Cronbach alpha for the 15-item measure was 0.88.Supplemental analyses utilizing the reduced 5-item scale fromDwyer et al. (2000)were alsoperformed and the results were essentially identical to those incorporating the full scale.

ACKNOWLEDGMENTS

We gratefully acknowledge the helpful comments of the participants in 2001

Annual Meeting of the Accounting, Behavior & Organizations Section, the 2002

Critical Perspectives in Accounting Conference, and the accounting research work-

shops at the Australian National University and at Washington State University.

REFERENCES

Adler, A., & Aranya, A. N. (1984). Comparison of the work needs, attitudes and preferences of profes-

sional accountants at different career stages. Journal of Vocational Behavior(August), 4557.


32/215


33/215


34/215


Rest, J. R. (1986).Moral development: Advances in research and theory . New York: Prager Press.

Rest, J. R. (1993). Guide for the defining issues test. Version 1.3. Minneapolis, MN: University of

Minnesota.

Rest, J., Narvaez, D., Bebeau, M. J., & Thoma, S. J. (1999). Postconventional moral thinking: A

neo-kohlbergian approach. New Jersey: Lawrence Erlbaum Associates.

Rest, J., Thoma, S. J., & Edwards, L. (1997). Designing and validating a measure of moral judgment:

Stage preferences and stage consistency approaches.Journal of Educational Psychology, 89(1),

528.

Schroeder, R. G., & Imdieke, L. F. (1977). Local-cosmopolitan and bureaucratic perceptions in public

accounting firms.Accounting, Organizations and Society,1, 3945.

Shaub, M. (1994). An analysis of factors affecting the cognitive moral development of auditors and

auditing students.Journal of Accounting Education,12, 126.

Shaub, M., Finn, D., & Munter, P. (1993). The effects of auditors ethical orientation on commitment

and ethical sensitivity.Behavioral Research in Accounting,5, 145169.

Siegal, P., Blank, M., & Rigsby, J. (1991). Socialization of the accounting professional: Evidence of the

effect of educational structure on subsequent auditor retention and advancement. Accounting,

Auditing and Accountability Journal,4, 5870.

Sorenson, J. E. (1967). Professional and bureaucratic organization in the public accounting firm. The

Accounting Review,42(July), 553565.

Sorenson, J. E., & Sorenson, T. C. (1974). The conflict of professionals in bureaucratic organizations.

Administrative Science Quarterly(March), 98106.

Street, D. L., Schroeder, R. G., & Schwartz, B. (1993). The central life interests and organizational

professional commitment of men and women employed by public accounting firms.Advances

in Public Interest Accounting,5, 201229.

Sweeney, J. T. (1995). The moral expertise of auditors: An explanatory analysis.Research on Account-

ing Ethics,1, 213234.

Sweeney, J. T., & Fisher, D. G. (1998). An examination of the validity of a new measure of moral

judgment.Behavioral Research in Accounting,10, 138158.

Sweeney, J. T., & Fisher, D. G. (1999). Politics, faking, and self-presentation: How valid is the Pscore

of the Defining Issues Test?Research on Accounting Ethics,5, 5175.

Tajfel, H., & Turner, J. C. (1985). The social identity theory of intergroup behavior. In: S. Worchel &

W. G. Austin (Eds), Psychology of Intergroup Relations(2nd ed., pp. 724). Chicago: Nelson-

Hall.

Watts, R. L., & Zimmerman, J. L. (1986). Positive accounting theory. Englewood Cliffs, NJ: Prentice-

Hall.

Wheeler, R., Felsig, R. M., & Reilly, T. (1987). Large or small CPA firms: A practitioners perspective.

CPA Journal(April), 2933.


35/215

AN ANALYSIS OF GROUP

INFLUENCES ON GOING

CONCERN AUDITOR JUDGMENTS

Sunita S. Ahlawat and Timothy J. Fogarty

ABSTRACT

Studies that have indicated that the processing of audit evidence results in

judgment bias may be the result of the study of individual decision-making.

Building on work that suggests important differences between individual

and group decision-making, this paper evaluates decision-making attributes

of audit groups. Experienced auditors from offices of Big-Five firms in theU.S. served as the participants in an experiment involving the going concern

judgment. Results show that recency does affect the judgments of individual

auditors but disappears as an important effect when groups make judgments.

Group responses are less extreme and exhibit greater confidence than those

of individuals.

INTRODUCTION

The descriptive theory of belief updating proposed by Hogarth and Einhorn (1992)

posits that the order in which evidence is received has a significant and predictable

influence on a persons final judgment. Most of the attention generated by this

discovery has focused around recency effects. Recency refers to the tendency to

place a greater weight on evidence received later in a sequence. Accordingly, an

over-reliance on information presented last may occur. A number of experimental


Advances in Accounting Behavioral Research, Volume 6, 2751

2003 Published by Elsevier Ltd.

ISSN: 1474-7979/doi:10.1016/S1474-7979(03)06002-2

27


36/215

28 SUNITA S. AHLAWAT AND TIMOTHY J. FOGARTY

studies utilizing various conditions suggest that significant recency effects exist in

accountants and auditors belief revisions (e.g.Asare, 1992; Ashton & Ashton,1988; Dillard et al., 1991; Pei et al., 1992; Trotman & Wright, 1996; Tubbs

et al., 1990). However, recent research has questioned the prevalence of recency

in auditing.Cushing and Ahlawat (1996)suggested that such effects may not be

common in audit practice. Other studies also have produced evidence that recency

effects do not always occur, or occur only under certain circumstances (Kennedy,

1993; Messier & Tubbs, 1994; Trotman & Wright, 1996).

This paper builds on the growing recognition that contextual factors (e.g.

accountability, cognitive involvement, experience, and task realism) might

mitigate judgment bias in audit judgment. Another potential factor is group

influence. Many auditing situations involve either formal or informal group

consultation (Gibbins & Emby, 1985). For example, a team of audit staff and

seniors typically conduct audit fieldwork. The group expands as managers and

partners review this work prior to the issuance of an audit report. However, the

growing recognition that cognitive heuristics and biases in auditors judgments

can lead to different outcomes, including different types of audit reports (e.g.

Asare, 1992),has developed with little consideration of group influences.

This research investigates the potential for group processes to overcome

weaknesses in accountants judgment. In addition to the recency bias, this paper

also examines the related attributes of decision confidence and belief revision

that vary between audit groups and individual auditors. This research finds

fundamental differences between groups and individuals in their exposure to

recency effects, the nature of their belief revision processes, and their confidence in

decisions. Four subsequent sections are employed. The first develops the lit-

eratures surrounding group decision-making and judgment biases as a prelude

to stating the research hypotheses. The second describes the empirical study.

The last two sections present the results and discuss their implications and

limitations.

LITERATURE REVIEW AND RESEARCH HYPOTHESES

Groups and Group Decision-Making

The unique condition of the group in business settings has been studied for some

time. Early studies measured the impact of social cues and interpersonal opinions

on performance and cognitive investment (Weiss & Shaw, 1979; White et al.,

1977). As this area matured, interactive effects between group conditions andindividual attributes were recognized (e.g. Vance & Biddle, 1985). Apart from


37/215

An Analysis of Group Influences on Going Concern Auditor Judgments 29

these more generic aspects, groups also were found to influence decision-making.

Although individuals come to the group with some degree of pre-discussionpreferences and unique decision-relevant information that continue to influence

group decisions (Winquist & Larson, 1998), the group resists reduction to the

sum of its members. Groups are believed to produce substantively different

decisions than individuals (Hill, 1982; Miner, 1984). The improved accuracy of

groups that has been reported in many areas may be attributable not only to the

increased perspectives contributed by members, but also to the heightened caution

as consensus processes tend to eschew extreme solutions (Myers & Lamm,

1976). Although the balance of evidence suggests net gains for group decisions

over those of individuals, a full explanation of their origin remains elusive. The

extent that groups may be effective at reducing the random error associated with

individual choice, may depend on the effectiveness with which feedback can be

incorporated. Group advantages may also center on the reduction of individual

variability. However, the importance of these conditions varies with the context

of the decision.

Group Decision-Making in Accounting and Auditing

Solomons (1987)review of the literature on multi-auditor decision-making has

not resulted in a critical mass of work on audit groups. Notwithstanding the paucity

of academic treatments, the audit process resolutely remains the result of group

deliberations. Evidence gathered by auditors continues to reflect team processes.

Work done by staff members still requires a consensus distillation of conclusions.

Work reviewed by supervisors, and then by partners, indicates a group orientation

toward the work.1 The computerization of the audit may have changed the medium

for group interaction but it has not altered the necessity for a meeting of the minds

by auditors.

A going concern decision involves aspects of both individual and multi-persondecision-making. The decision is based on many pieces of evidence that may have

been gathered and initially reviewed by selected individuals. Because predicting

the going concern status is critical, it is unlikely to be made by an individual

without extensive consultation with the audit team and other audit firm members.

While the decision itself is likely to be made by a group, individual opinions

also are important since pivotally-situated individuals (managers, seniors, and

staff), who themselves have weighed the evidence, make recommendations,

and suggestions. Consultation with other auditors prior to important decisions

(such as going concern) conforms to the requisites of professional auditingstandards (Reckers & Schultz, 1993). If group judgments are significantly


38/215


different from individual judgments, the practical implications of going concern

studies involving only individual judgment alone may be somewhat limited.The going concern judgment has been characterized as a series of belief

revisions, where each revision is the weighted average of the previous judgment

and the value of the current evidence (Asare, 1992; Cushing & Ahlawat, 1996).

The final revised belief is then compared to the threshold for substantial doubt

for issuing an unqualified opinion (Asare, 1992). Thus, unlike most other audit

decisions, the going concern matter goes right to the bottom line for both clients

and auditors.

The evaluation of going concern status is regarded as critical, difficult, and

complex by most partners (Chow et al., 1987). This necessitates some considera-

tion of how such a decision is made.Cushing and Ahlawat (1996)asserted that in

order to effectively revise beliefs the auditor must: (1) read and comprehend all

information cues provided; (2) adequately recall relevant information provided

in prior stages of the sequential task; (3) give sufficient attention to relevant prior

and new information at each stage; (4) effectively relate all of this information to

his or her existing knowledge structure; and (5) develop a problem representation

sufficient to complete the task effectively. Failure to carry out any one or more of

these activities could contribute to the recency effect (Cushing & Ahlawat, 1996).

However, these requisites also imply that recency can be reduced with greater

effort or attention. A number of studies have encouraged active involvement in the

above activities. These include studies that examined the effects of accountability

(Kennedy, 1993; Tetlock, 1983), documentation (Cushing & Ahlawat, 1996),

explanation (Anderson & Sechler, 1986), and commitment (Church, 1991).

Tetlock (1983)andKennedy (1993)reported that judgments were less prone to

order effects when participants were told that they may subsequently have to justify

or explain their conclusions to others, such as their superiors. Apparently, the mere

prospect of accountability was sufficient to produce more desirable information

processing. In contrast,Cushing and Ahlawat (1996)andChurch (1991)required

participants to prepare a memorandum documenting the rationale for an auditdecision. Similar results of reduced recency were reported. A common objective

underlying these manipulations was to produce greater cognitive involvement and

effort among participants.

Although many decisions in the audit process are important, few match the

consequences of the going concern decision. Accordingly, the audit firm would

like to be highly confident that it has made the correct decision. The measurement

of endogenous and exogenous levels of confidence has been part of the study of

groups for some time (e.g.Zarnoth & Sniezek, 1997).In situations that lack clear

correct answers, such as the going concern area, confidence and accuracy are notredundant (Luus & Wells, 1994).The formation of groups to make decisions may


39/215


be a means to increase confidence levels. However, at this point it is unclear if

audit groups are more confident about such decisions than would individuals bewhen making the same decision.

In sum, group dynamics may provide opportunities for more complete problem

analysis of the going concern decision. The group process may be another form of

cognitive investment that people put into a decision. Focusing primarily upon the

tendency towards recency effects in such an environment allows us to evaluate the

impact of the group. However, other group differences may also be involved for a

broader picture of how groups compare to individuals in the auditing context.

Hypotheses

The studies discussed above suggest that the tools that enhance cognitive involve-

ment can mitigate order effects. Group decision-making can serve to enhance

effort and involvement. Group assistance can also be useful in lessening task

demands. Groups have collective experience to draw from, whereas individuals

work alone. Studies in social psychology have found that livelier interaction

among group members was associated with superior performance (e.g.Valacich

& Schwenk, 1995).Interacting groups also reduced belief perseverance (Wright

et al., 1990).These findings suggest that the interaction process itself may have

a positive effect on judgment.

Two aspects of group process could contribute to superior performance. The

group tends to broaden the information set that is brought to bear upon a choice

(Stasser, 1992). This information set includes perspectives on what factual data

means and what limitations it possesses. Group processes also reduces individual

inconsistency or extremity (Schultz & Reckers, 1981). As information exchange

between members occurs, group interaction becomes a corrective function when

individual members have initially incomplete or biased information (Stasser &

Titus, 1985) and are encouraged to alter opinions in order to reach a collectivejudgment (Stasser & Davis, 1981).

The complexities of some audits make group processes even more salient.

Auditors are aware of the importance of group work and the need to share and

integrate expertise (Schultz & Reckers, 1981). The audit requires considerable

knowledge about industries and competitive factors in order to ascertain the con-

sequences of account balance fluctuations.Fisher and Ellis (1990)suggested that

social pressures created by the group interaction process would moderate extreme

or divergent views held by group members as they work to accommodate each

others views. In an audit setting, groups may be useful in preventing anecdotalexperience about certain business conditions from being overly generalized.


40/215


Groups may collectively recognize patterns and relationships that individuals

working alone may not. Group discussion can lead to a more complete problemanalysis resulting in improved judgment quality. Judgment quality is a function

of capacity, effort, internal data (i.e. memory and knowledge), and external data

access (Kennedy, 1993). Because of potential pooling of resources, correction of

errors, and use of qualitatively different learning strategies, process gains from

interaction are possible (Hill, 1982). Estimation biases observed with individual

judgments can be reduced considerably through group interaction (Sniezek &

Henry, 1989). Similarly, group interaction also may mitigate recency due to some

combination of enhanced capability, experience, and cognitive involvement.2

This study specifically examines the consequences of group interaction as a

means to overcome the limitations of the study of individuals engaging in acts that

are more likely performed by groups. By holding the amount of information that

decision-makers have more constant than would be true in an actual audit, this study

enables a focus upon the judgment process. Since groups can increase cognitive

effort, reduce complexity, and capitalize on experience, they should exhibit less

recency bias than individuals. Recency may not be a serious problem in practice

if audit groups are less susceptible to the order in which evidence is presented.

Based on the preceding discussion, the following hypothesis is tested:

H1. Audit groups will exhibit less recency effects in their going concernjudgments than will individual auditors.

Over the last fifteen years, many researchers have recognized that individual

confidence is an important dimension of group interaction. Unlike accuracy,

confidence can be made explicit at the time judgments are made. Therefore,

confidence is a key indictor of the extent that uncertainty is perceived to be

inherent in a task. High levels of uncertainty suggest that a decision is unusually

sensitive to differences in judgment. This condition may make judgment biases

more consequential to the decision. Accordingly, confidence and accuracy can be

affected by different factors (Luus & Wells, 1994).Sniezek and Henry (1989, 1990) postulate a two-stage process for groups

to reach a consensus judgment: (1) the revision process; and (2) the weighting

process. At the revision stage, individual judgments are voluntarily revised in

light of information exchanged during interaction. At the weighting stage, group

members use some implicit or explicit rule to combine divergent views and

negotiate their individual judgment to form a single group judgment. This process

is sufficiently engaging and explicit so that when group members adopt a single

group judgment, they may have higher confidence in that group judgment than

they would have had in their own individual judgment (Sniezek & Henry, 1990).After the weighting process, group members should express higher confidence


41/215


about their decision because it takes into account a wide set of perspectives on

importance. Lower confidence would be inconsistent with the social pressuresthat support the participatory consensus formation around the groups choice. As

such, the group interaction process may lead to higher group confidence compared

to the individual members pre-group confidence (Sniezek & Henry, 1989, 1990).

The greater confidence may also reflect individuals recognition that groups can

potentially recognize, evaluate, and process more information than individuals.3

In an accounting study, Bloomfield et al. (1996) showed that interaction that

inspired group confidence contributed to group performance. In a different vein,

Allwood and Granhag (1996) found that groups inspired not only confidence,

but also realistic confidence.

The level of confidence is particularly important for the going concern decision

made by auditors. The evaluation of business survival is inherently oriented toward

the future and therefore is more uncertain than most auditing decisions. Since the

going concern decision has distinct adverse consequences for the client, high levels

of confidence are called for to withstand the client resistance that is likely to result.

Accordingly, the following hypothesis will be considered:

H2. Audit groups will exhibit greater confidence than individual auditors about

going concern decisions.

Research over the last thirty years has identified many reasons to depart from

the belief that the direction of influence in decision-making is symmetrical.

Human beings are not bound to strict mathematical consistency when dealing

with information that points to one conclusion relative to information that leads

to an opposite result. Pivoting around a baseline (zero), positive movements and

negative cues of equal magnitude have often been shown to be processed in a

qualitatively differently way. However, the reasons that individuals are influenced

by these frames of reference are imperfectly understood (Newman, 1980).

If group-based reasoning is capable of integrating more information and wider

perspectives, it also may be capable of altering the tendency to treat categories ofcues in ways that are inconsistent with Bayesian logic. The more varied experiences

available to the group as input to their decision may work against the tendency

to over-weigh the negative or the positive. If framing effects are psychological in

nature, forcing them into open discussion may have the effect of exposing their

inconsistency. In other words, there may be more balance in how groups react to

positive and negative types of information than there would be in how individuals

react to that same information.

Auditing has been described as the attempt to confirm a series of interrelated

hypotheses about the clients accounting records (Church & Schneider, 1993).Evidence that the accounts are correct as stated therefore can be logically


42/215


opposed to evidence of material error. The going concern decision appears to be

a special case of this bifurcation of evidence, here contrasting pro-survival andanti-survival implications for the business entity. Whereas the former mitigates

against a going concern problem, the latter type tends to confirm such a problem.

What individual auditors may do in the consideration of these types may not be

the same as what groups would do. Individual auditors may not be as able to

recognize that they are acting in a way that systematically over weighs either

positive or negative information. Groups may therefore be less likely to overreact

to either good news about audit client viability or bad news about doubtful

continuation. A two-part hypothesis that pinpoints the possibilities of difference

would be:

H3a. Audit groups will revise their beliefs about going concern in response to

confirmatory going concern evidence less than individual auditors.

H3b. Audit groups will revise their beliefs about going concern in response to

mitigating going concern evidence less than individual auditors.

In sum, four specific effects that differentiate groups and individuals are expected.

Groups should be less influenced by the order of the evidence that they consider

in a going concern decision context. They should also exhibit higher levels of

confidence about the accuracy of their determinations. Groups are expectedto be more temperate in their reactions to incremental positive and negative

information. Together, the hypotheses suggest that groups will make less bias and

more confident going concern decisions.

THE EXPERIMENT

An experiment was designed to test the hypotheses in a context where auditors

are asked to evaluate a clients ability to continue as a going concern. This typeof context has been employed frequently in prior studies of recency effects in

audit judgment. The specific task in the experiment involves making a series of

judgments about a firms going-concern status and a recommendation about the

type of audit report to issue.

The experiment was conducted in the offices of the participating international

public accounting firm over a four-week period. In each office, arrangements were

made for subjects to participate as individuals or as members of three-person

groups. Judgments were made privately by individuals or collaboratively in

groups. Although the assignment of participants to conditions was random, groupcomposition was subject to member availability at the pre-established time for


43/215


the exercise.4 The only qualifying stipulation was that participants were primarily

engaged in the auditing activities of the firm and that they had at least two yearsof experience. A researcher distributed and collected all materials in person. For

groups, the researcher was present outside the meeting room for the duration of

the deliberations. Individuals completed the task in their offices, but without the

physical proximity of the researcher.

Task and Procedure

Each participant was provided with case material. Although each member of the

group was given a copy of the case, groups were instructed to respond collectively

on a single response sheet. Group members were encouraged to discuss the case

prior to reaching a consensus. Each group designated one member to record the

group response.

A cover letter accompanying the case materials suggested that the task should

take about 60 minutes to complete. Whereas letters to groups emphasized the

importance of working collectively, letters to individuals stressed the need for

independent work. Both types of letters asked participants to proceed through the

materials in one sitting. All participants were guaranteed anonymity, assured that

there were no right or wrong answers, and told that most of the questions dealt

with matters of professional judgment.

Participants were asked to read the case assuming that they were performing a

review of preliminary results from the current years audit engagement. The case

was previewed for realism and relevance by audit professionals other than the

participants and was revised in accordance with their suggestions.

The experimental materials consisted of a set of instructions and a case

booklet. The case booklet contained background and financial information for a

hypothetical client. The background information included a detailed description

of the industry and a company, its operations, economic environment, and the typeof audit opinion it had received in the last two years. The financial information

comprised audited financial statements for the past three years and the current

year. This information included the balance sheet, income statement, selected

financial ratios, footnotes, statement of changes in financial position, and schedule

of working capital changes. The experimental materials were designed to create

a case in which the audit decision was not an obvious unqualified or modified

(going concern) opinion.

Figure 1depicts the sequence of procedures required of the auditors for the

experiment. The case consisted of four tasks. Participants were asked to completeeach task in the order given to capture belief revision. They were instructed to


44/215

Fig. 1. Procedure for the Experiment.


45/215


46/215


existence through the end of current fiscal year. After providing the last of these

assessments, participants were again asked to recommend the type of audit reportto be issued and to indicate their confidence in the appropriateness of that report.

The six items were presented in two orders. In the condition labeled MMMCCC

on Fig. 1, the three mitigating factors (MMM) were presented first, followed by the

three pieces of contrary information (CCC). The order of evidence was reversed

in the second condition, labeled CCCMMM. The variation in the order of cues

was the recency manipulation. Each of these items was presented on a new page

contained in an envelope. Participants were asked to complete a new 0100 scaled

sealed assessment of the hypothetical companys continuation as a going concern

b

behavioural finance in accounting.pdf

Documents