Clients' Expectations on Audit Judgments: A Note

Iyer, Venkataraman M;Rama, Dasaratha V

Behavioral Research in Accounting; 2004; 16, ABI/INFORM Complete
pg. 63

BEHA VIORAL RESEARCH IN ACCOUNTING

Volume16,2004
pp. 63-74

Clients' Expectations on Audit Judgments:

A Note

Venkataraman M. Iyer
University of North Carolina at Greensboro

Dasaratha V. Rama
Florida International University
ABSTRACT: Audited financial statements can be viewed as the product of
negotiations between a company's management and its auditor. Relative power of
these two parties is a major factor that determines the outcome of the negotiation.
This study examines the impact of auditor tenure, importance of a client to an audit
partner, nonaudit pur chases, and prior audit firm experience of client personnel on
client perceptions about their ability to persuade the auditor in the context of an
accounting disagreement. We obtained responses to a survey from 124 CPAs in
industry who are employed as CEOs, CFOs, controllers, or treasurers. Our results
indicate that respondents from companies with short auditor tenures were somewhat
more likely to indicate that they could per suade the auditor to accept their (client's)
position in case of a disagreement. This finding is consistent with the argument that
auditors are susceptible to influence in the early years as they are still in the process
of recouping start-up costs, but is not consis tent with concerns expressed by
legislators and others that long auditor tenures will adversely affect audit quality.
Respondents who believed their business was more important for the audit partner
were also more likely to believe that they could persuade the auditor. However, the
purchase of nonaudit services and prior audit experience were not related to client's
perceptions about their ability to persuade the auditor.

uring the latter part of the 1990s, the Chairman of the SEC gave many speeches in which
he expressed his concerns that auditors are under pressure not to stand in the way of the
"numbers game" played by managers (see, for example, Levitt 1996, 1998, 2000a,
2000b).
The SEC was particularly concerned about pressures on auditors to give in to client preferences,
especially on gray issues where there is room for judgment. I Such client pressures create a
situation in which the audited financial statement can be viewed as the product of negotiations
between company management and the auditor (Gibbins et al. 2001; Wright and Wright 1997).
Gibbins et al. (2001) report that all the respondents in their study (audit partners from six
international firms) experienced negotiation with some of their clients.
In negotiations between two parties, the ultimate outcome is often influenced by the relative
power of each party (Goldman and Barlev 1974).They suggest that the relative power in the
auditor client relationship will have an influence on the client's ability to persuade the auditor to
accept the

Professor Iyer gratefully acknowledges the financial support received from Bryan School of Business and Economics at
University of North Carolina at Greensboro.
I

If the auditor goes along with client management in actions that violate clear accounting or auditing rules, then that
constitutes collusion or fraud. Such fraud is not the focus of this paper.

63

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

lyer and Rama

64

client's preference. Some recent studies have examined the auditor-client negotiation process from
the perspective of the auditor (Gibbins et al. 2001; Salterio and Koonce 1997), but there is little
empirical evidence related to the client perspective on negotiations.
Clients' perceptions are important because they are likely to affect their strategies and ultimately
may affect the results of the negotiation process. In fact, Gibbins et al. (2001) call for research on
client managements' perceptions of the key factors affecting negotiations with auditors. Prior re
search (e.g., Neale and Northcraft 1991) suggests that parties to a negotiation are guided by their
beliefs about each party's relative power to devise strategies and tactics. For example, if clients
believe that they have relative power over the auditor, then they may be more likely to stand firm and
attempt to pressure the auditor to accept their viewpoint.
The relative power between the client and auditor may be influenced by a diverse set of factors,
such as the length of the auditor-client relationship, the importance of the client to the auditor, the
type of services provided by the auditor, the type of client, and the nature of the professional
penalties facing the auditor. In this paper, we examine the influence of some of these factors on client
perceptions of their ability to persuade the auditor in ambiguous situations.
The next section discusses the background, and develops the research questions. This is fol
lowed by a description of method and results. The paper ends with summary and conclusions.
BACKGROUND AND RESEARCH QUESTIONS
As noted by the SEC (20oob) and Johnstone et al. (2001), the most frequent threats to auditor
objectivity arise in ambiguous situations that necessitate auditor judgments on issues where there is
no clear-cut guidance in professional standards. Some prior studies have found that in situations
where authoritative guidance is ambiguous, audit judgments are significantly impacted by client
preferences (Trompeter 1994; Salterio and Koonce 1997; Haynes et al. 1998). However, these prior
studies have examined only auditors' views. In contrast, this paper examines clients' perceptions
about their ability to persuade the auditor in an accounting dispute where there are no clear profes
sional guidelines.

Auditor Tenure
The association between auditor tenure and audit judgments has long remained an issue of
concern for regulators and others." Mautz and Sharaf (1961,208) suggest that the greatest threat to
auditor independence arises from "a slow, gradual, almost casual erosion of his 'honest disinterest
edness.'" The Metcalf Committee report (U. S. Senate 1976,21) notes that "long association be
tween a corporation and an accounting firm may lead to such close identification of the accounting
firm with the interests of its client's management that truly independent action by the accounting firm
becomes difficult." Such concerns have led to periodic calls for mandatory auditor rotation. Under
lying such calls for mandatory auditor rotation is the argument that as the length of auditor tenure
increases, there is increased likelihood of auditors going along with the wishes of the client in
accounting matters (U.S. Senate 1976; BusinessWeek 2002). Proponents of mandatory auditor rota
tion suggest that limiting the value of incumbency would reduce the client's ability to influence the
auditor (Copley and Doucet 1993; Brody and Moscove 1998).
In contrast to the regulatory concerns noted above, economic models suggest that the threats to
auditor independence and objectivity may be greatest in the initial years of an audit engagement.
DeAngelo (1981) suggests that incumbent auditors enjoy quasi-rents due to start-up costs incurred
by the auditor and the client. This leads to the practice of "low-balling" where the initial-year audit
fee is set below cost, and the audit fee rises in future years (to enable the auditor to recoup the initial
investmentj.' This suggests that auditors would be more vulnerable to threats of dismissal in the
See, for example, Mautz and Sharaf (1961), U.S. Senate (1977), and SEC (1994).
See Simon and Francis (1988) and Deis and Giroux (1995) for evidence on the practice of low-balling in the audit
market.

Behavioral
2004

Research

in

Accounting,

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Clients'

Expectations

on

Audit

Judgments:

Note

65
early years of an auditor's tenure. Hence, auditors are likely to be influenced more by the manage
ment of a newly acquired client than by the management of a client that has been audited for a longer
period (Dye 1991).4
There has been growing demand for mandatory rotation of auditors since the collapse of Enron
(BusinessWeek 2002). During the congressional hearings following the Enron failure, many wit
nesses argued in favor of mandatory auditor rotation (U.S. Senate 2002). While mandatory auditor
rotation was not part of the final version of the Sarbanes-Oxley Act of 2002, Section 207 requires the
Comptroller General of the United States to "conduct a study and review of the potential effects of
requiring the mandatory rotation of registered public accounting firms."
The first research question examined in this paper focuses on the impact of auditor tenure on
clients' perceptions about their ability to persuade auditors in disputes involving accounting matters.

RQl: Is there an association between auditor tenure and clients' beliefs about convincing
the auditor to adopt their position in accounting disputes?

Importance of Client to Audit Partner

Many previous studies have addressed the issue of client importance on auditor judgments. For
example, studies examining audit opinions find that the likelihood of receiving a going-concern
modified opinion is lower for larger companies (e.g., McKeown et al. 1991; Hopwood et al. 1994).
In a study examining audit adjustments, Wright and Wright (1997) find that auditors are less likely to
propose adjustments for errors detected in audits of larger clients.'
Prior studies that have examined auditor judgments have focused on client importance primarily
from the perspective of the audit firm. However, the SEC (2000b) has specifically noted that the
incentives of the individual audit partners cannot be ignored in the context of audit judgments.
Specifically, the Commission noted:
[T]he reputational interests of the audit firm are not the same as the reputational interests of the
audit engagement partner or the office of the partner that performs most of the work for an
audit client ... [T]he audit engagement partner and the office have more to gain by, for
example, acquiescing to the client's aggressive accounting treatment than they have to lose if it
results in audit failure, particularly if the client engagement contributes substantially to the
partner's in come and the office's revenues. Reputational damage will be spread across the
entire firm, whereas income from the client will be concentrated in the partner and the office
out of which he or she works. (SEC 2000b)
Trompeter (1994) documented an association between partner compensation schemes and audi
tor judgments. Specifically, he finds that auditors' ability to withstand client-imposed pressures is
associated with the type of partner compensation scheme used by the audit firm.
The second research question examined in this paper focuses on the importance of a client to an
audit partner and clients' perceptions about their ability to persuade auditors in disputes involving
accounting matters.

RQ2: Is there an association between the perceived importance of a client to an audit

partner and clients' beliefs about convincing the auditor to adopt their position in
accounting disputes?
4

Auditors with short tenures may also be concerned about reputation effects if they are perceived as being dismissed by
the client shortly after obtaining a new client; such action could be interpreted as a problem with the audit firm.
In theory, the initial costs represent "sunk costs" and hence should be irrelevant to future decisions. However, prior
research demonstrates that sunk costs are not ignored in decisions (Staw 1976; Staw and Ross 1987).
These results can also be attributed to large companies having easier access to the capital markets, better internal
control including internal audit, and higher materiality thresholds.

Behavioral Research in Accounting, 2004

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

66

Iyer and Rama

Nonaudit Services
In many speeches during recent years, Chairman Levitt of the SEC expressed his dismay over
the shadow cast by the increasing importance of nonaudit services on auditor objectivity and inde
pendence. He noted that:
As the firms expand their product lines, consulting and other services may shorten the distance
between the auditor and management. Independence-if not in fact, then certainly in appear
ance-becomes a more elusive proposition ... While it may never be quite so explicit, some
auditors know, and others suspect, that their compensation is influenced by how well they
"man age" that relationship in its entirety. (Levitt 2000a)
The SEC (2000b) asserted that nonaudit services "create economic incenti ves that may inappro
priately influence the audit" and increase the "risk that the auditor will be less vigilant in its objectiv
ity." During the hearings related to the proposed restrictions on nonaudit services, critics of the SEC
repeatedly challenged the SEC to produce empirical evidence supporting its actions. The SEC
(2000b) responded by noting that perceptions matter when it comes to auditor independence and
that:
We must make judgments about the circumstances that render a loss of auditor objectivity more
or less likely ... the actual issue is whether providing these services makes it unacceptably
likely that there will be an effect on the auditor's judgment, whether or not the auditor is aware
of it.
Client perceptions about auditor objectivity are important because perceptions can influence
actions (such as clients' negotiations with auditors). Many previous studies have examined the
perceptions of investors and creditors about auditors providing nonaudit services to their clients
(see, for example, Pany and Reekers 1984, 1988; Lowe et al. 1999). However, there is a paucity of
research examining the impact of non audit purchases on clients' beliefs about their ability to per
suade the auditor in ambiguous situations. The arguments above suggest that clients who purchase
significant non audit services may be more likely to believe they can persuade the auditor to adopt
their position on ambiguous disputes involving accounting matters. On the other hand, it is possible
that providing nonaudit services would enhance the auditor's knowledge of the client, thus increas
ing their relative power during negotiations with the client (Goldman and Barlev 1974). This leads to
the third research question:
RQ3:

Is there a positive association between the amount of nonaudit services purchased

and clients' beliefs about convincing the auditor to adopt their position in account
ing disputes?

Audit Experience
Chief Financial Officers and other officers who have worked as auditors in public accounting
firms may be more likely to be aware of the audit methods and the negotiation process between the
clients and the auditors. Expertise in accounting and negotiations is an important factor to the
process and outcome of the negotiation (Gibbins et a1. 2001). A client's superior knowledge of the
company's processes and financial condition is a source of client's expertise power (Pasewark and
Wilkerson 1989). Similarly, client employees who have worked in a public accounting firm would
likely be aware of the auditing standards and the audit process. Such knowledge about the workings
of the audit process may help in negotiations with the auditor. This leads to the fourth research
question:
RQ4: Is there a positive association between respondents' prior audit experience and
clients' beliefs about convincing the auditor to adopt their position in accounting
disputes?

Behavioral Research in Accounting, 2004

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Clients' Expectations on Audit Judgments: A Note

67

METHOD AND DATA

We used a questionnaire to obtain data from respondents who were CPAs working in the
corporate sector. A copy of the questionnaire is provided in the Appendix. We asked for demo
graphic data about the respondent, including prior experience with a CPA firm (Q9 and Q10),
specialization in audit, tax, or advisory services (Qll), and rank at the time of leaving (QI2).
Questions about the employer included auditor tenure (Q6), size/industry (Q4 and Q5), and
purchase
of nonaudit services from the incumbent auditor (Q7).6 One of the questions (QI5) asked
respon
dents to indicate the relative importance of their company's business to the audit partner-in-charge
(IMP) using a five-point scale (1 = insignificant proportion, 5 = very high proportion). The last
question of the instrument included a short case that briefly described a dispute related to
unrecorded
liabilities'? Respondents were asked to indicate the probability that they can have the auditor not
require the liabilities to be recorded in the financial statements, by placing a mark on a
probability line between 0 (very low probability) and 100 (very high probability). This measure is
the dependent variable in our subsequent analysis.
We obtained a list ofCPAs who are employed as CEO, CFO, controller, or treasurer in industry
from the AICPA. We mailed the questionnaire to 700 names selected randomly from the AICPA
list. We obtained 124 responses (response rate = 18 percent), but seven of the respondents did
not provide one or more of the answers required for our analysis.f There were no significant
differences along any of the dimensions examined in this study, between the early and late
respondents."
RESULTS
Descriptive Data

Table 1 provides details about the sample composition.Eighty-nine of the 117 respondents
were from private companies, and 92 respondents were employed by companies with annual
sales less than $250 million. No single industry dominates the sample, and more than half of the
companies had non-Big 5 auditors.
Table 2 provides descriptive data about the sample of respondents and their companies'
interac tions with the incumbent auditor. As seen in Panel A of Table 2, the mean (median)
tenure of the incumbent audit firm was 11.8 (8) years. Since auditor tenure ranged from 1 to 65
years, and in view of the relatively high value of the standard deviation, we use natural log of
auditor tenure (LNTEN) in our analysis.'?
Panel B of Table 2 reports that 76 respondents (66 percent) gave a rating of I or 2 on the
five point scale measuring the importance of the client to the audit partner-in-charge, while 40
respon dents (34 percent) gave a rating of 3 or higher. As seen in Panel C, 21 respondents noted
that the company did not purchase nonaudit services from the incumbent auditor, but 31
companies pur chased nonaudit services such that the nonaudit service fee was more than 50
percent of the audit fee. Panel D reports that 60 percent of the respondents had worked in the
audit area of a CPA firm.

7
8

9
10

New SEC rules mandate that proxy statements filed after February 5, 2001, include information related to audit and
nonaudit fees. However. this rule is applicable only to public companies. Concerns related to auditor independence are
also applicable in the context of nonpublic companies. As noted later, 77 percent of our sample companies were
private.
This case was adapted from an earlier research involving auditor's behavior in an audit conflict situation (Tsui and Gul
1996).
Our response rate is similar to those obtained in prior studies that use AICPA mailing list. (See Fogarty et al. [2000] for
a discussion of response rates in surveys that use membership lists.)
Six percent of the respondents were CEO or President of their companies, while 65 percent were at the rank of CFO or
Vice-President at their companies; 19 percent indicated they were controllers; and 10 percent chose "other."
Responses received after three weeks from mailing were considered as late responses. We did not follow up with
nonrespondents.
Geiger and Raghunandan (2002) also use log of auditor tenure in their analysis of going-concern modified opinions.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Behavioral Research in Accounting, 2004

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

68

lyer and Rama

TABLE 1
Sample Composition
Panel A: Company Ownership
Type of Company
Private
Public
Total

Panel B: Company Size

Annual Sales
< $250 million
$250 million to $1 billion
> $1 billion
Total

Number of Companies

89
28
117
Number of Companies

92
13
12

117

Panel C: Industry
Industry

Number of Companies

Manufacturing

39

Financial

11

Retail

12
27
28

Other Services
Other
Total

117

Panel D: Auditor Type

Auditor Type

Number of Companies

Big 5
National
Regional
Local
Sole Proprietor

54
13

Total

20

27
3

117

Panel E of Table 2 provides details about respondent's probability estimate that the auditor
would not require the discovered liabilities to be recorded. The mean (median) response for the
variable was 46 (50.0). As seen by the 25th and 75th percentile responses, there was a wide
divergence in the probability estimates. As mentioned earlier, this is the dependent measure.
Panel F of Table 2 provides the correlation matrix between the independent variables of interest,
and the dependent variable. Considering the six correlations between the four independent variables,
none exceeds 0.35, indicating that collinearity is not likely to be a problem. This was confirmed by
subsequent tests indicating that none of the VIF scores exceeded 1.2, well below the cutoff of 3.0
suggested by Belsley et aJ. (1980) as an indication of multicollinearity problems.
Regression Results
We use a multiple regression to examine respondents' perceptions about their ability to per
suade the auditor. The explanatory variables of interest are auditor tenure, importance of client to the
auditor, the extent of non audit services purchased from the incumbent auditor, and prior experience
in auditing.
Table 3 provides the results from the regression. The model is marginally significant (p = .055;
R2 = .07). LNTEN (natural log of auditor tenure) is negative and significant (p < .10, two-tailed)

Behavioral Research in Accounting, 2004

69

Clients' Expectations on Audit Judgments: A Note

TABLE 2
Descriptive Statistics about Responses to Questionnaire
Panel A: Auditor Tenure (TEN, in years)
Mean
11.8
Standard deviation
12.4
25th percentile
4.5
Median
8
75th percentile
15
Panel B: Importance of Client to Audit Partner (IMP, 1 = Insignificant,S = Very High)"
Number of companies
Importance
(Proportion)
1
36(31%)
2
40 (35%)
3
27 (23%)
4
10 (9%)
5
3 (2%)
Panel C: Nonaudit Fee Ratio (NAS)
Nonaudit Fee Ratio
Number of Companies
(relative to audit fee)
(Proportion)
o
21 (18%)
Less than 50%
65 (56%)
More than 50%
31 (26%)
Panel D: Prior Audit Experience (AUDX)
Worked as auditor for a
Number of Companies
CPA firm?
(Proportion)
Yes
70 (60%)
No
47 (40%)
Panel E: Ability to Persuade the Auditor (PROB) (probability of having the auditor not require liabili
ties to be recorded)
Statistic
Value
Mean
46
Standard deviation
25
25th percentile
35
Median
50
75th percentile
65
Panel F: Correlation Matrix
LNTEN

NAS
IMP
AUDX
a

NAS

IMP

.31

.34

.12

AU

- D .17
X
-.06
.10

PROB

---.08
-.05
.17
.13

One respondent did not provide the answer for this question.
PROB = probability of having the auditor not require the liability to be recorded in the financial statements;
LNTEN = log of auditor tenure, in years;
NAS = 2 if nonaudit fee greater than 50 percent of audit fee, 1 if nonaudit fee between 1 and 50 percent of
audit fee, and 0 otherwise;
IMP = importance of business to audit partner-in-charge, on a five-point scale; and
AUDX = 1 if previously worked in audit area ofa CPA firm, 0 otherwise.

Behavioral Research in Accounting, 2004

70

Iyer and Rama

TABLE 3
Regression Model for Clients' Probability Estimates that Auditor
will not Require Liability Recognition
Model: PROB = bo + bl*NAS + b2*LNTEN + b3*IMP + b/AUDX
Parameter
Intercept
LNTEN
NAS
IMP
AUDX

Coefficient

t-statistic

p-value

42.10
-5.62
3.27
5.14
6.45

5.75
-l.82
0.63
2.20
1.36

0.000
0.071
0.533
0.030
0.177

F = 2.61, P = .055, R2 = .07

n (sample size) = 117
PROB = probability of having the auditor not require the liability to be recorded in the financial statements;
LNTEN = log of auditor tenure, in years;
NAS = 2 if nonaudit fee greater than 50 percent of audit fee, I if nonaudit fee between I and 50 percent of audit fee,
and 0 otherwise;
IMP = importance of business to audit partner-in-charge, on a five-point scale; and
AUDX = I if previously worked in audit area of a CPA firm, 0 otherwise.

indicating that probability estimates increased as auditor tenures decreased. This means that respon
dents from companies with shorter auditor tenure believed they would be more likely to persuade the
auditor.'! The coefficient for IMP is positive and significant (p < .05, two-tailed), indicating that
probability estimates increased as their relative importance to the audit partner increased. This
means that the respondents believed they would be more likely to persuade the auditor when their
business was important to the partner-in-charge. The coefficients for NAS and A UDX are not signifi
cant in the regression.
As additional analyses, we included the following variables in the regression: (1) type of
company (public versus private), (2) company size (annual sales less than $250 million, between
$250 million and $1 billion, more than $ 1 billion), (3) auditor type (Big 5, other), (4) time elapsed
since leaving the public accounting firm, (5) rank in the public accounting firm at the time of leaving
the firm, (6) if the respondent had prior employment experience with the public accounting firm
currently serving as auditor, and (7) current job rank. None of these factors was associated with the
dependent variable examined in this study, either in a univariate setting or in the regression.
SUMMARY AND CONCLUSIONS
When audited financial statements are viewed as resulting, in part, from the negotiation process
between the auditor and the client, perceived relative power by each party becomes important. Prior
research has not looked at factors that affect clients' perceptions about their ability to persuade the
auditor in the context of an accounting dispute. This study examined the effect of some factors on
clients' perceptions about their ability to persuade the auditor in the context of an accounting
disagreement.
The results indicate that respondents from companies with long auditor tenures are less likely to
believe they could persuade the auditor. Thus, the results do not suggest that long auditor tenures are
perceived by management to erode auditor independence and objectivity. They are consistent with
the predictions of economic models such that clients' relative power may be greatest at the beginning
II

When we use the square-root transformation (instead of the logarithm), the tenure variable is significant at p < .10
(one tailed). When we use the tenure in years without any transformation, the variable is no longer significant at
conventional levels.

Behavioral Research
2004

in

Accounting,

Clients' Expectations on Audit Judgments: A Note

71

of an auditor-client relationship. However, this finding has to be interpreted with caution because
of the marginal significance of the variable.
The results also indicate that respondents' perceptions about their ability to persuade the
auditor were positively associated with the overall importance of the client to the audit partnerin-charge. However, there was no association between either the purchase of nonaudit services or
prior audit experience and respondents' beliefs about their ability to persuade the auditor.
We believe the above findings are relevant to the ongoing debates about the impact of auditor
tenure and nonaudit fees on auditors' objectivity and judgments. While the respondents from our
sample were primarily from private companies, it is important to note that many auditors and
others believe that restrictions may, in the future, be imposed on firms auditing nonpublic clients
also (SEC
2000a). The importance of such concerns is highlighted by the fact that Section 209 of the
Sarbanes Oxley Act attempts to alleviate such fears by clarifying that the standards of the Act
should not be presumed to be applicable for small- and medium-sized nonregistered (with the
Public Company Accounting Oversight Board) public accounting firms.
This study is subject to the following limitations. First, we only gave a brief case without
significant details. It is possible that responses may vary depending on context. Second, due to
the nature of the survey and the type of respondents (primarily nonpublic companies), we were
unable to obtain information about the financial condition of the respondents' companies. It is
likely that the responses could vary depending on the financial condition of the client. Third, our
sample is re stricted to client officers (CEO, CFO, controller, or treasurer) who are CPAs.
Moreover, clients' expectations could be affected by the seniority, experience, and knowledge
level of the auditor (relative to the client). These are interesting areas for future research.

Behavioral Research in Accounting, 2004

72

lyer and Rama

APPENDIX
Questionnaire

I. Demographic Data
1.
2.
3.
4.

5.
6.
7.
8.

Male 0 Female 0
Current Job Title: CEO/President 0 CFOIVice-Pres. 0 Controller 0 Other
_
Your company is: Public 0 or Private 0
Industry: Manufacturing 0 Financial 0 Retail 0 Other Services 0 Other
The annual net sales of your company is: < $250 Million 0 $250 MM - $ 1 Billion 0
How long has the current audit firm audited your company?
Years.
Does the audit firm provide any nonaudit services? Yes 0 No 0
If yes, nonaudit fee is: > 50% of audit fee 0 < 50% of audit fee 0 Do not know 0
Please classify your auditor into one of the following categories:
Big 5 0 National 0 Regional 0 Local firm 0 Sole Proprietor 0

> 1 billion 0

II. Background
9. Are you an ex-employee of the CPA firm that audits your organization? Yes 0 No 0
10. Are you an ex-employee of any other CPA firm? Yes 0 No 0
If you answered No to both questions above, please proceed to question 15.

11.
12.
13.
14.

What was your specialization upon leaving? Audit 0 Tax 0 MAS 0 Other 0
Please indicate your title upon departure. Jr. 0 Sr. 0 Mgr. 0 Sr. Mgr 0 Partner 0
What was your date of departure (year)?
Have you ever participated in the external audit of your current employer? Yes 0 No 0

Your firm's business (audit and non-audit) constitutes (scale: 1 = insignificant proportion; 5 = very high
proportion)
1 2 3 4 5
15. 0 0 0 0 0
of the overall business of the partner in charge of your company's audit.
III. Please respond to the following short case. We appreciate that normally you would require more
information. However, for the purpose of our study we ask that you respond based on the limited
information provided.
In the current year's audit, a dispute has arisen between you and the external auditor of your company
over the materiality of certain unrecorded liabilities discovered during the audit. Professional and firm
guidelines do not provide a definitive answer on the materiality of the amount involved. In your opinion, the
amount is not material. However, the auditor disagrees and argues that the total amount of unrecorded
liabilities is material and therefore it is necessary to make adjusting entries in the financial statements.
16. What is the probability that you can have the auditor not require these liabilities to be recorded? Please
indicate your response by marking with an X on a specific point on the following scale:

10

20

30

40

Very low likelihood

Behavioral Research in Accounting, 2004

50

60

70

80

90

100

I I

Very high likelihood

Clients' Expectations on Audit Judgments: A Note

73

REFERENCES

Belsley, D., E. Kuh, and R. Welsch. 1980. Regression Diagnostics. New York, NY: John Wiley.
Brody, R. G., and S. A. Moscove. 1998. Mandatory auditor rotation. National Public Accountant (March): 3235.
BusinessWeek. 2002. Accounting in crisis. (January 28): 44-48.
Copley, P. A., and M. S. Doucet. 1993. Auditor tenure, fixed fee contracts, and the supply of substandard
Single Audits. Public Budgeting & Finance (Fall): 23-35.
DeAngelo, L. E. 1981. Auditor independence, "low balling," and disclosure regulation. Journal of
Accounting and Economics 3 (2): 113-127.
Deis, D. R., and G. Giroux. 1995. The effect of auditor changes on audit fees, audit hours, and audit quality.
Journal of Accoullling and Public Policy 15 (1): 55-76.
Dye, R. 1991. Informationally motivated auditor replacement. Journal of Accounting and Economics 14 (4):
347-374.
Fogarty, T. J., J. Singh, G. K. Rhoads, and R. K. Moore. 2000. Antecedents and consequences of burnout in
accounting: Beyond the role stress model. Behavioral Research in Accounting 12 (1): 31-67.
Geiger, M. A., and K. Raghunandan. 2002. Auditor tenure and audit reporting failures. Auditing: A Journal of
Practice & Theory 21 (1): 67-78.
Gibbins, M., S. Salterio, and A. Webb. 2001. Evidence about auditor-client management negotiation concern
ing client's financial reporting. Journal of Accounting Research 39 (3): 535-563.
Goldman, A., and B. Barlev. 1974. The auditor-firm conflict of interests: Its implications for independence.
The Accounting Review 49 (4): 707-718.
Haynes, C. M., J. G. Jenkins, and S. R. Nutt. 1998. The relationship between client advocacy and audit
experience: An exploratory analysis. Auditing: A Journal of Practice & Theory (Fall): 88-104.
Hopwood, W. S., J. C. McKeown, and J. E. Mutchler. 1994. A reexamination of auditor versus model
accuracy within the context of the going-concern opinion decision. Contemporary Accounting
Research (Spring):
409-31.
Johnstone, K., M. H. Sutton, and T. D. Warfield. 2001. Antecedents and consequences of independence
risk: Framework for analysis. Accounting Horizons (March): 1-18.
Levitt, A. 1996. The guardians of financial truth. Remarks delivered at the Financial Reporting Institute,
University of Southern California, Pasadena, June 6. Available at: http://www.sec.gov/news/speechl
speecharchivel1996/spch106.txt.
---.
1998.The numbers game. Speech delivered at the NYU Center for Law and Business, New York,
NY, September 28. Available at: http://www.sec.gov/news/speechlspeecharchive/1998/spch220.txt.
---.
2000a. Renewing the covenant with investors. Remarks delivered at the NYU Center for Law and
Business, May 10. Available at: hup://www.sec.gov/news/speech/spch370.htm.
---.
2000b. Remarks of Chairman Arthur Levitt before the Conference on the Rise and Effectiveness of
New Corporate Governance Standards, Federal Reserve Bank of New York, New York, NY, December
12. Available at: hup://www.sec.gov/news/speechlspch449.htm.
Lowe, D. 1., M. A. Geiger, and K. Pany. 1999. The effects of internal audit outsourcing on perceived
external auditor independence. Auditing: A Journal of Practice & Theory (Supplement): 7-26.
Mautz, R. K., and H. A. Sharaf. 1961. The Philosophy of Auditing. American Accounting Association Mono
graph No.6. Sarasota, FL: AAA.
McKeown, J. C., J. E. Mutchler, and W. S. Hopwood. 1991.Toward an explanation of auditor failure to
qualify the opinions of bankrupt companies. Auditing: A Journal of Practice & Theory (Supplement):
1-13.
Neale, M. A., and G. B. Northcraft. 1991. Behavioral negotiation theory: A framework for conceptualizing
dyadic bargaining. Research in Organizational Behavior (13): 147-190.
Pany, K., and P. M. 1. Reekers. 1984. Non-audit services and auditor independence: A continuing problem.
Auditing: A Journal of Practice & Theory (Spring): 89-97.
---,
and ---.
1988. Auditor performance of MAS: A study of its effects on decisions and perceptions.
Accounting Horizons (June): 31-38.
Pasewark, W. R., and 1. E. Wilkerson, Jr. 1989. Introducing ... the power quintuplets: Client power and
auditor independence. The Woman CPA 51 (3): 13-17.

Behavioral Research in Accounting, 2004

74

lyer and Rama

Salterio, S., and L. Koonce. 1997. The persuasiveness of audit evidence: The case of accounting policy
decisions. Accounting, Organizations and Society 22 (6): 573-587.
Securities and Exchange Conunission (SEC). 1994. Office of the Chief Accountant: Staff Report on Auditor
Independence. Washington, D.C.: SEC.
---.
2000a. Public hearing on proposed auditor independence rules. September 13. Available at: http://
www.sec.gov/rules/extralaudmin2.htm.
---.
2000b. Revision of the Commission's Auditor Independence Requirements. Release Nos. 33-7919; 3443602; File No. S7-13-00. November 21. Washington, D.C.: SEC. Available at: http://www.sec.gov/
rules/final/33-7919.htm.
Simon, D. T., and J. R. Francis. 1988. The effects of auditor change on audit fees: Tests of price cutting and
price recovery. The Accounting Review 63 (2): 255-269.
Staw, B. 1976. Knee-deep in the big muddy: A study of escalating commitment to a chosen course of action.
Organizational Behavior and Human Performance 16: 27-44.
---,
and J. Ross. 1987. Behavior in escalation situations: Antecedents, prototypes, and solutions. Research
in Organizational Behavior 9: 39-78.
Trompeter, G. 1994. The effect of partner compensation schemes and generally accepted accounting
principles on auditor judgment. Auditing: A Journal of Practice & Theory (Fall): 56-68.
Tsui, J., and F. A. Gul. 1996. Auditors' behavior in an audit conflict situation: A research note on the role of
locus of control and ethical reasoning. Accounting, Organizations and Society 21 (1): 41-52.
U.S. Senate. 1976. The Accounting Establishment. Prepared by the Subconunittee on Reports, Accounting
and Management of the Conunittee on Governmental Affairs. Washington, D.C.: Government
Printing Office.
---.
1977. Improving the Accountability of Publicly Owned Corporations and Their Auditors. Prepared
by the Subcommittee on Reports, Accounting and Management of the Committee on Governmental
Affairs. Washington, D.C.: Government Printing Office.
---.
2002. Oversight Hearing on "Accounting and Investor Protection Issues Raised by Enron and Other
Public Companies." U.S. Senate Committee on Banking, Housing and Urban Affairs. February 12,26,
and 27; March 6, 14, 19,20, and 21. Washington, D.C.: Government Printing Office.
Wright, A., and Wright S. 1997. An examination of factors affecting the decision to waive audit adjustments.
Journal of Accounting, Auditing and Finance 12 (1): 15-36.

Behavioral Research in Accounting, 2004