Managerial Auditing Journal

Performance evaluation of auditors: a constructive or a destructive tool of audit

output
Rabih Nehme
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Rabih Nehme , (2017),"Performance evaluation of auditors: a constructive or a destructive tool of
audit output ", Managerial Auditing Journal, Vol. 32 Iss 2 pp. 215 - 231
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Performance evaluation of Performance

evaluation of
auditors: a constructive or a auditors

destructive tool of audit output

Rabih Nehme 215
Department of Finance and Accounting, Lebanese American University,
Beirut, Lebanon

Abstract
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Purpose The purpose of this paper is to investigate factors leading to dysfunctional behavior. The role of
auditors has been under scrutiny during recent accounting scandals. Auditors, among other parties, are
sometimes to be blamed as a result of economic crisis periods. The paper highlights certain auditors behavior
leading to dysfunctional acts.
Design/methodology/approach The survey of this paper is made up of statements extracted from the
performance appraisal templates used at the Big Four firms in the UK. Big Four auditors are expected to be
under pressure more than non-Big Four auditors. The sample is stratified into non-experienced/experienced
auditors to highlight any changes in the perception of dysfunctional behavior when the experience factor
exists.
Findings The paper finds that certain performance appraisal procedures are leading to dysfunctional acts.
Accordingly, audit firms should develop other evaluation techniques that should serve their goals without
pushing auditors for dysfunctional behavior.
Originality/value This study links procedures embedded in the performance appraisals at the Big Four
audit firms to dysfunctional behavior. Also, the study covers all lines of auditors to understand how the
perception toward dysfunctional behavior differs when auditors gain experience.
Keywords Performance appraisals, External auditors, Big Four
Paper type Research paper

Introduction
The boom of human resource management (HRM) has led to changes in the way firms
evaluate staff in audit firms (Brierley and Gwilliam, 2003). This change was a response to the
transformation of small, self-effacing audit firms to larger, multinational audit firms. Such
companies adopted a new staffing structure known as the pyramidic staffing structure that
demonstrates the success of an auditor in the company moving up the hierarchy seeking
partnership or leaving the company. High competing auditors for promotion can lead to
inconvenient staff behavior and low audit quality. High staff turnover and assigning
inexperienced staff to do the audit work can lead to the frustration of clients and lower audit
quality (Brierley and Gwilliam, 2003). Audit managers are confronting many control
problems. One of the most important problems is making decisions concerning the behavior
of a subordinate (Kaplan and Reckers, 1985). The complication in the ability of
decision-making and leadership of the senior auditor can lead to poor performance. Audit
quality is affected by dysfunctional behavior and staff turnover (Public Oversight Board,
2000). Being a huge concern in auditing, dysfunctional behaviors can affect audit quality Managerial Auditing Journal
Vol. 32 No. 2, 2017
directly or indirectly. pp. 215-231
Performance appraisals of external auditors are said to be an important tool to monitor Emerald Publishing Limited
0268-6902
audit quality (Andiola, 2014). The literature on auditors feedback is limited because of the DOI 10.1108/MAJ-09-2016-1446
 MAJ confidentiality practiced at audit firms (Herrbach, 2001), mainly the Big Four. Achieving
32,2 good quality audit creates a feeling of pride inside the auditors. Managers with remarkable
efforts are normally promoted (Nalebuff and Stiglitz, 1983). The pace of the promotion
appraisal is slow at senior hierarchical levels. Auditors chance to get promoted is higher
based on their past performance (Demer et al., 2016).
This paper investigates the impact of performance evaluations used at the Big Four audit
216 firms. Whether the appraisal and the promotion process is creating a constructive or a
destructive atmosphere for audit output. The sample is made up of external auditors
employed at the Big Four firms in the UK. The UK is considered the house of accountancy
because three out of the four Big Four firms started their business originally in the UK
(Deloitte, PwC and KPMG). Big Four auditors are expected to handle most of the complex
audit assignments. Shedding light on potential dysfunctional behavior in these firms may
help in reducing audit scandals and improve audit quality. The respondents were asked their
agreement to a series of statements. After the mean response of all the respondents was
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discussed, the sample was stratified into audit trainees/experienced auditors to assess any
differences in understanding the performance appraisal process at each level of experience.
The next section of this paper is the literature review in relation to performance appraisal and
theoretical framework. The methodology and research design follows. Then, the results are
summarized, and the last section discusses conclusions based on the research findings.

Literature review
The long-term success of audit firms is well defined by the quality of their opinion (Herrbach,
2001). Audit quality is not easy to measure and it is sensitive to auditors behavior. Partners
and other firm affiliates can have different interests from non-experienced auditors which
could lead to adverse results on the motivation of auditors in the workplace. These different
views can weaken the quality of the audit and destroy the audit profession. Emby and
Etherington (1996) have stated that previously HRM was not of great importance when
dealing with audit companies value systems. Nowadays coaching has been put into practice,
where for each audit assistant, a senior auditor is assigned as a coach to evaluate their
performance.
It is important to understand the effect of organizational commitment and communication
on job performance and job stress (Chen et al., 2006). Work performance is better for full time
accountants compared to managers whose job includes accounting work. Stress levels are
not decreased by more organizational communication and do not affect job performance.
Therefore, stress in the accounting profession may have different effects than stress in other
fields. Williams et al. (2001) mention that job stress leads to physiological and behavioral
problems that negatively affect job performance. The most severe behaviors are insufficient
supervision on team members, filling out performance appraisals of staff irresponsibly and
quickly and exerting intense pressure on the audit team (Herrbach, 2001).
Audit firms should be aware that static performance appraisal processes may lead to a
dysfunctional behavior. It is because of the fact that a sabotage may exist between high
performing auditors when there are limited opportunities (Demer et al., 2016). The
orientation on the feedback process is considered an essential part of the appraisal process
(Andiola and Bedard, 2016). Junior auditors with strong orientation feedback coordinate
positively with their coaches/mentors compared to those with poor orientation. It is worth
mentioning that better attributes, with strong feedback orientation, is not always associated
with positive appraisal outcome. The issue of distressed auditors with negative feedback can
be resolved by proper planning and coaching with defined learning goals (Vandewalle et al.,
2001).
 The discussion during a review session is positively related to the preparers motivation, Performance
but it is negatively related to the reviewers motivation in an evaluation process (Miller et al., evaluation of
2006). The performance improvement is highly related to the level of experience of auditors.
Preparers obtain an increase in performance improvement compared to reviewers. Miller
auditors
et al. (2006) state that experienced auditors might be trained to such evaluation processes that
could have led to this negative relationship.
Hyatt and Taylor (2013) conclude that audit supervisors tend to report false sign-off of
staff auditors when it was made intentionally and when the staff auditors are not facing time 217
budget pressure. The study is related to the theory of retributive justice and to what extent
observers (senior auditors) assign responsibility to a wrongdoer (staff auditors). Also, senior
auditors are more tolerant with false sign-offs when the act is unintentional and took place
under high time budget pressure. Hyatt and Taylor (2013) highlight the training aspect.
They reinforced the importance of staff auditors training programs for less-false sign-off
activities. Senior auditors should be trained also on their perception on when and what to
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report and to be vigilant when reviewing staff auditors work.

Actions that affect audit quality directly include premature sign-off by eliminating steps
from the audit procedure (Otley and Pierce, 1995), gathering of insufficient evidence
(Alderman and Deitrick, 1982), altering or replacing audit procedures and processing
inaccuracy (McDaniel, 1990) and omitting audit steps (Margheim and Pany, 1986). Also, false
sign-off is defined when auditors clear an audit procedure stating it has been accomplished
but in fact it has not (Hyatt and Taylor, 2013). On the other hand, underreporting of
chargeable time is known to have an indirect effect on audit quality (Lightner et al., 1982;
Kelley and Margheim, 1990; Smith, 1995). Underreporting of audit time causes poor
decisions, hinders the need for revising the budget and obscures the time pressure that would
be exerted on future audits.
Competitive advantage among employees can be created when the strategy is aligned
with high performance work practices (Wright and McMahan, 1992; Jackson and
Schuler, 1995). Huselid (1995) studies the link between high performance work practices
and firm performance, finding that investments in work practices enhances productivity
and financial performance, which in turn causes the impact of lowering employee
turnover. High performance work practices include (Jones and Wright, 1992; US
Department of Labor, 1993):
[] comprehensive employee recruitment and selection procedures, incentive compensation and
performance management systems, and extensive employee involvement and training [which] can
improve the knowledge, skills, and abilities of a firms current and potential employees, increase
their motivation, reduce shirking, and enhance retention of quality employees while encouraging
nonperformers to leave the firm.

Theoretical argument
Stakeholder theory explains the relationship between organizations and their external
environment (Freeman, 1984). Stakeholders represent the big umbrella for all individuals
and parties that may have interest in an organization. Stakeholders can be bankers,
suppliers, creditors, government bodies, political groups and employees. A stakeholder is
defined as a human agency that can have an impact or affect organizations (Gray et al., 1996).
Because of this role of stakeholders, organizations are accountable not only to shareholders
only but also to stakeholders. As a result of this accountable relationship, many factors and
conditions exist to maintain and manage the stakeholder organizations relationship.
Stakeholders concept is involved in the development of strategic planning performance
measures (Atkinson et al., 1997).
 MAJ The use of the stakeholder theory is not limited to a single type of research. It has been
32,2 used in different methodologies, various types of evidence and various techniques for
appraisal (Freeman, 1984). Wijnberg (2000) states that companies should serve the interest of
stakeholders solely. The stakeholder theory explains the relationship between the
organizations and different stakeholders. It is used in assessing the relationship between
auditors behavior and audit firm performance appraisal procedures. Audit firms may have
218 different stakeholders but the study will be analyzing only one stakeholder who is the
auditors/employees and how they behave when expecting a performance appraisal.

Performance evaluation framework

Donnelly et al. (2003) find that auditors who have an external locus of control, who rate their
own performance lower than others and who have higher turnover intentions are more likely
to accept dysfunctional behaviors. While those who have an internal locus of control, who
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self-rate themselves higher and who have lower turnover intentions are less likely to accept
dysfunctional behaviors. Even though Chen et al. (2006) find that job performance is not
affected by stress level, Otley and Pierce (1995), Lightner et al. (1983) and Alderman and
Deitrick (1982) conclude that factors in the environment, such as control systems in firms and
time pressure, are common reasons for dysfunctional behaviors and why such behavior is
accepted (Public Oversight Board, 2000). Firms should manage the pressure of time put on
audits to help decrease the amounts of dysfunctional behaviors that are occurring.
Chargeable hours are not the only criteria for performance evaluations. Performance
evaluations, are conducted based on a set of meticulous categories. Performance evaluations,
mainly at the Big Four audit firms, are prepared based on a set of detailed categories and
sections. The performance review at KPMG is prepared based on technical knowledge,
operational responsibilities and behavior skills (KPMG, 2011). At Ernst & Young (EY), the
assessment process is classified into four sections as follows:
(1) people;
(2) quality;
(3) operational excellence; and
(4) market leadership and growth (Ernst&Young, 2011).

PriceWaterhouseCoopers (PwC) classifies their performance coaching and development

(PC&D) process into more detailed sections covering areas related to relationship and
sustainability of clients, leadership and contribution to team success, demonstration of
courage and integrity, learning sharing and innovation, application of commercial and
technical expertise, having a spirit of agility and finally managing projects and economics
(PriceWaterhouseCoopers, 2011). It appears that audit firms use such assessment tools as
part of their human capital strategy either to retain their staff or to create areas for
improvement for low performance staff.
When facing scarcity in auditors, evaluations are seen as less significant (Pierce and
Sweeney, 2004). Regardless the defined sections presented at the Big Four evaluation
appraisal templates, they are primarily used to meet budget-related objectives (Otley and
Pierce, 1996). Geographical and demographical factors also play a role in the performance
evaluation process (Soobaroyen and Chengabroyan, 2006). Factors affecting auditors
behavior are reduced when working in a family business environment.
Netemeyer and Maxham (2007) conclude that the supervisors approval on employees
performance rating is positively related to the customer satisfaction rather than the actual
rating of employees and the subjective assessment of the rater. An appraisal system is
 considered to be playing a positive role in employees morale (Dipboye, 1985). The Big Four Performance
audit firms in the UK is dominating around 90 per cent of the listed companies (Beattie et al., evaluation of
2003). Accordingly, the UK market is considered to be one of the top leading markets where
Big Four firms have significant impact on the economy.
auditors
Based on the review of the literature, two research questions are developed in the next
section of the paper.

Research design 219

Research questions
The main research questions of this study are:
RQ1. How to assess if external auditors that responded to the survey behave
dysfunctionally during the audit when they are expecting a performance
appraisal?
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RQ2. Is there is a difference in the perception of the dysfunctional behavior between

audit trainees/experienced auditors in relation to performance appraisal?

Survey and sample

The survey contains a series of statements where the respondents are asked their level of
agreement with the statements using the five-point Likert scale technique where 1 stands for
Strongly Agree, 2 stands for Agree, 3 stands for No Opinion, 4 stands for Disagree and 5
stands for Strongly Disagree. To develop the statements for the survey, this study uses the
same performance appraisal statements that are used in the Big Four assessment templates.
The sample for this study is made up of 145 usable surveys collected from the Big Four
audit firms in the UK during 2014. Initially, 167 surveys were sent to auditors. To maintain
a high response rate, mailed surveys and group-administered surveys methods were used to
collect the data. The survey used was reviewed and validated. A pilot study was conducted
to assess its appropriateness to cover the research scope. As part of answering RQ2, the
survey was communicated to different levels of auditors.
The first analysis is based on the mean and median scores of all the respondents as a
result of using the five-point Likert scale. In data mining, normally the mean score is used, as
it represents a set of objects, and it is calculated by the average of the numbers divided by the
set number. The mean value is also useful in the analysis, as it represents an essential
amount in statistics, and it is the middle number of an arranged list of numbers (Hyndman
and Koehler, 2006). A mean scored above three indicates that the replies are heading toward
disagreement and replies below three indicate replies are heading toward agreement.
For the second analysis to assess any significant variances between audit trainees and
experienced auditors, the MannWhitney U test is used. This test is the most suitable test to
provide efficacy in a non-parametric data (John and Priebe, 2007). The MannWhitney U test
is used to assess any significant variances between the responses of audit trainees and
experienced auditors after stratifying the sample. When the difference between the mean
value of the two groups, within the same sample, is at 95 per cent (i.e. *p\0.05), this indicates
a significant difference. Accordingly, the two groups have different perception regarding the
question they answered (Fagerland and Sandvik, 2009). The next section discusses the
findings from the survey.

Results
Descriptive statistics of the sample
The results in Table I indicate that the total response rate for the four audit firms is 87 per
cent. This is considered an acceptable response rate as compared to other studies conducted
 MAJ on auditors behavior (Fisher, 2001; Herrbach, 2001; Kelley and Margheim, 2002; Coram et al.,
32,2 2004; Pierce and Sweeney, 2004; Nehme et al., 2016). Field visits were organized to Big Four
offices to secure a high response rate. Questionnaires were circulated and collected during
the field visits. Table I indicates that the questionnaire response rate was collected equitably
from the four firms which helps in generalization and avoids responses from a single firm
that may direct the whole sample. About two thirds of the respondents were males and one
220 third were females.
The breakdown of auditors comprising the sample of this empirical study is presented in
Table II.
The breakdowns of period of employment in accountancy and period of employment
with the current employer are presented in Table III. It can be noted that the managers/
directors are the least group of auditors (18 per cent) that have stayed in the accountancy
field. It is because of the fewer number of manager/directors answering the survey
statements. Also, it can be the result of the high turnover of auditors at this level because of
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competitive offers outside the audit profession. The same argument applies to audit trainees.
They constitute the majority of auditors who have the least years of experience (36 per cent),
and they are the biggest group of auditors who are employed with the current employer
(61 per cent). This is because of the fact that auditors start an accountancy career; they
accumulate a certain number of years in the profession until they are promoted to manager/
director level where they move out from accountancy for better competitive packages and job
offers.
The above conclusion can be supported by referring to the period of employment with
the current employer section. It can be noted that the majority of respondents (61 per cent)
are newly employed at their employer. Managers/directors are the least group of auditors
(6 per cent) that have stayed with the current employer. This can be because of the fact that
by the time they have a managerial role (manager/director), auditors become more
experienced and get exposed to different types of industries where they start receiving
competitive job offers and packages. This is the nature of the audit/accountancy profession
where auditors work in different lines of service and are assigned to diverse types of

Survey items Firm A Firm B Firm C Firm D Total

Total questionnaires sent 39 48 35 45 167

Total questionnaires received 36 44 32 43 155
Usable responses 35 41 30 39 145
Response rate (%) 90 85 86 87 87
Table I.
Response rate and Respondents gender
breakdown of Male 27 27 21 22 97
questionnaires Female 8 14 9 17 48

Job title No. of respondents (%)

Audit trainee 53 37
Senior auditor 26 18
Manager/director 60 41
Table II. Partner 5 3
Respondents level Other 1 1
breakdown Totals 145 100
 Survey items Audit trainee Senior auditor Manager/director Partner Other Total (%)
Performance
evaluation of
Period of employment in accountancy (years) auditors
0-2 50 2 1 0 0 53 36
3-5 3 18 11 0 1 33 23
6-8 0 5 21 0 0 26 18
8 0 1 27 5 0 33 23
Number of respondents 53 26 60 5 1 145 100 221
Period of employment with the current employer (years)
0-2 52 16 18 2 1 89 61
3-5 1 10 22 0 0 33 23
6-8 0 0 8 0 0 8 6 Table III.
8 0 0 12 3 0 15 10 Employment
Number of respondents 53 26 60 5 1 145 100 breakdown
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companies (manufacturing, trading, construction, financial services, etc.). This diverse

experience helps auditors to become knowledgeable in many different market segments and
to possess a remarkable know how that makes them very marketable.
The results in Table IV indicate the need for a professional qualification to progress in the
accountancy field. It is interesting to find that the majority of managers/directors (55 out of
60, 92 per cent) possess a professional qualification. There are even five managers/directors
who possess dual professional qualification (CPA/CFA, ACCA/CFA, CPA/CIA, ACCA/CIA,
CPA/CIA). Also, all partners who participated in this survey possess a professional
qualification (4 ACCA, 1 CISA). Table IV clearly highlights the gap between individuals
progressing to graduate and post-graduate degrees and/or to accomplishing professional
qualifications. Only 36 per cent of auditors/respondents finished a graduate degree (Masters
and PhD), whereas the majority of managers/directors (92 per cent) possessed a professional
qualification (ACCA, CPA, etc.). This concern has been raised by Coughlan (2012) where it
was mentioned that UK universities are failing to attract skilled staff needed by a modern

Respondents % of all
education Staff auditor Senior auditor Manager/director Partner Other Total respondents

Highest degree
Bachelor degree 50 16 25 1 1 93 64
Masters degree 2 9 35 4 50 35
PhD 1 1 2 1
Totals 53 26 60 5 1 145 100
Professional qualification(s)
ACCA 6 30 4 40 28
CPA (US) 2 8 18 28 19
CFA 3 1 4 3
CIMA 0
CIA 2 6 8 6
Other(s) 2 3 1 6 4
Totals 2 18 60 5 1 86 60 Table IV.
Academic and
Notes: CVA (1): certified valuation analyst; CISA (3): certified information system audit; CFSA (1): certified professional
financial services auditor; CFE (1): certified fraud examiner background
 MAJ economy. This gap between graduate degrees and professional qualifications could be
32,2 because of the nature of the accountancy profession. Accountancy firms, especially the Big
Four, care more about hiring and retaining those who are professionally qualified rather than
those who possess graduate degrees.
As a result of the findings, the gap between professional qualification and graduate
degree can be justified, as having a professional qualification is becoming one of the
222 fundamental factors in the promotion scheme within the Big Four.

Assessment of dysfunctional behavior for distinguished performance

evaluation
The main objective of including in the survey the statements listed in Table V is to assess if
auditors could commit dysfunctional behaviors for the purposes of attaining a distinguished
performance evaluation. Two aspects selected as indicators of dysfunctional behavior are
premature sign-off and under-reporting of chargeable time. Although performance
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evaluation is mostly performed within the auditing firms, external aspects of the auditing
firm can also be involved in the process of evaluating auditors, including meeting clients
expectation, responding to clients requests promptly and contributing toward increasing
clients portfolio. Because the research is carried out in the UK covering the auditors who are
employees of the Big Four situated mainly in London offices, the ideal procedure required to
build the relationship among other auditors is largely determined by the relationship that
exists within the audit team at the initial level. Good relationships are also build with
auditors working on the same task at next stages. The Big Four London offices are highly
recognized for hiring a large number of auditors. It is always difficult for auditors to be
assessed based on the relationship existing among other colleagues within the firm.
Respondents at all staff positions were asked their level of agreement with statements listed
in Table V to assess the relevancy of the relationships they have with clients that might lead
to a better performance appraisal. The survey used the five-point Likert scale where 1 stands
for Strongly Agree, 2 stands for Agree, 3 stands for No Opinion, 4 stands for Disagree and 5
stands for Strongly Disagree.

Premature sign-off for all respondents

Statements S1 to S7 relate to premature sign-off of audit work performed. Based on the mean
response to S1 (2.01), respondents agreed that auditors may believe that a good performance
evaluation can only be successfully attained by building, maintaining as well as utilization of
clients network. Auditors also understand that good performance requires them to build
good internal relationship with other auditors, who are within the firm.
The mean response to S2 (3.39) shows that the respondents have no opinion as to the
likelihood of senior auditors exercising and applying less methodology for the purposes of
receiving the best feedback from clients. The median response (4) suggests that respondents
disagree that they would not follow firm methodology to receive positive feedback from the
client. For statements S3 and S4 both the mean and median are around three indicating that
the respondents do not agree or disagree that partners compromise when there is a risk of
losing a client or sign-off and audit prematurely to get a better performance review. This
seems to indicate that auditors are doing their job properly regardless of the possibility of
losing a client or getting a better performance evaluation. The respondents agree (S5 mean
2.17 and median 2) that meeting clients needs and getting involved in increasing clients
portfolio are essential for better performance evaluation.
Auditors are normally required to assess the internal governance mechanisms and
internal control framework during an audit assignment (Fan and Wong, 2005). The
weaknesses found in the design and the effectiveness of the internal controls are stipulated in
 Survey statements a
Mean (Median)
Performance
evaluation of
Premature sign-off auditors
S1. To progress their careers (get promotions) auditors tend to build, maintain
and utilize a network of clients and internal relationships to achieve a better
performance rating 2.01 (2)
S2. Strict audit firm methodology is less exercised by senior auditors in order
that they receive positive feedback from clients 3.39 (4) 223
S3. When there is a risk of losing an audit assignment, partners tend to
compromise rather than comply fully with audit firm methodology and
auditing standards 3.01 (3)
S4. Auditors tend to sign-off an audit step prematurely when such a sign-off
may positively affect their performance evaluation 2.94 (3)
S5. Audit managers participate in the development of ways to meet client
needs, increase clients portfolio and have more assignments so that they get
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better performance from their superiors 2.17 (2)

S6. Partners/directors tend not to report all material control weaknesses to get
assigned at a later stage to a non-audit assignment 3.29 (4)
S7. Auditors tend to rely less on subject matter experts even if the auditors
themselves are not highly knowledgeable in a certain area to maintain a good
recoverability rate 2.81 (2)
Under-reporting of chargeable time
S8. An auditor expecting a promotion may exercise less professional
skepticism if this would harm assignment profitability 3.30 (4)
S9. Auditors tend to choose the highest thresholds of sampling techniques for
the sake of achieving a good recoverability rate 2.74 (2)
S10. Senior auditors who assist in proposal preparation and research tend to
lower the budgeted hours to increase their chances of winning a proposal for
better evaluation from their superiors 2.66 (2)
S11. Auditors are asked to under-report chargeable hours to achieve a good
appraisal 3.32 (4)
S12. Auditors tend to work in their personal time rather than actual hours
spent to maintain a profitable assignment 2.23 (2)
S13. Finishing an audit assignment with a good recoverability rate is one of
the most important factors for a good appraisal and performance evaluation 2.61 (2)
S14. Audit managers delegate tasks based on the standard hourly rate of
every team member rather than the skills needed for every cycle to achieve a Table V.
good profitable assignments and consequently better appraisal 2.87 (3) Performance
evaluation for all
a
Note: 1 strongly agree, 2 agree, 3 no opinion, 4 disagree and 5 strongly disagree respondents

a supplement report, which is included as an additional part to the financial statements,

mainly called Letter to Management report. This report includes the following aspects:
auditors outcomes of control limitations, the deficiency effects on financial statements,
recommendation by auditors and a section for management responses that explains the
control weaknesses from their own perspective. In such cases, the control weaknesses
outcomes can have either insignificant or significant impacts on the financial statements
(ISA 265). When asked in S6 if some material control weaknesses were not reported so that to
obtain non-audit work, the mean of 3.29 and median of 4 suggests that the respondents
disagreed that this statement was true.
Based on the response to S7 (mean 2.81 and median 2), it is interesting to learn that a large
number of the respondents agree they rely less on the subject matter experts (SME)/
resource matter experts (RME) even in the cycles of the audit where they are not well
 MAJ knowledgeable about it to have a better recoverability rate. As a result of assigning a SME/
32,2 RME, there are additional charges that could be incurred causing lower profitability of an
audit assignment. The results reveal that the respondents agree to prematurely sign-off an
audit procedure regardless or not they understand well that particular task. As such, this
action could be a reason for consequently lowering the auditing quality and the rise of
dysfunctional behaviors.
224
Under-reporting of chargeable time for all respondents
Although the mean response to S8 is 3.3, the median response was 4 for all respondents. This
indicates that many respondents disagree that they would have less professional skepticism
if it would harm assignment profitability. The questionable mind characteristic is viewed to
have a significant effect in the audit profession no matter the challenges experienced. This
made an audit trainee mention the following:
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It depends on the auditors level. If they are managers and above my answer is yes. If at a lower level,
this behavior is no more often exercised.
The trainees comment is because of the fact that audit trainees do not often possess the same
level of professional skepticism for exercising it as audit managers. Similarly, the audit
trainees comment can be closely linked to the fact that audit managers belong to the
category of those who have been in the firm for the minimal time period. Auditors who are
employed as managers are more attracted to other employment opportunities. Managers are
more eager to be granted a good performance evaluation to improve their profile that makes
them in a better competitive docket as opposed to audit trainees.
To receive the best results of performance appraisal, respondents agree that they need to
work and finish-on profitable projects. This can be achieved by selecting the highest
materiality thresholds, which are pertained to the sampling techniques that may assist
auditors to spend less hours in the fieldwork. For S9, the mean was 2.74 and the median was
2, which indicates agreement to the statement. For some auditors, selecting the highest
thresholds may not be considered a dysfunctional behavior activity. A senior audit manager
had the following comment:
I have answered that I agree with this question if the thresholds are as per the methodology and no
corners have been cut. I am very much a fan of finding more efficient and smarter ways of
conducting an audit.
A number of auditors may tirelessly keep trying to look for new and smart methods that
could assist them in reducing the hours spent without causing an impact on the quality of
auditing. The sampling and materiality drivers largely depend on the professional
judgement of the auditors. In most cases, the sampling is largely based on the materiality
threshold at the initial stage and the type of findings at another stage. According to Elder
et al. (2010), the tolerance level and the sampling size is directly linked to the clients design
of control environment, the levels of risks pertained to different audit cycles and the
effectiveness and implementation of internal processes and procedures. According to Cohen
et al. (2007), auditors would lower the testing levels when there are effective roles of corporate
governance. On the other hand, Coram et al., (2004) noted that auditors would minimize the
level of sampling when there are low risks pertained to misstatement.
The respondents agree for S10, mean of 2.66 and mean of 2 that senior auditors will likely
increase clients portfolio through reducing the budgeted time to increase the opportunities of
winning a proposal as well as receiving a good performance evaluation. Budget preparers
intention to win client proposals and earn good performance evaluation may harm auditing
 practices and could lead to adverse results as the job cannot be performed adequately with Performance
the understated budget hours. evaluation of
In S11, the respondents disagree (mean of 3.32 and median of 4) on whether senior auditors
auditors ask other team members to under-report chargeable hours for purposes of good
performance appraisal. But, in S12 with mean 2.23 and median of 2, they agree that when a
performance appraisal is expected, auditors do underreport billable hours and do some of the
work on their personal time. Working in their personal time may affect auditors life outside 225
work and have superiors expecting them to do so on the next audit. S13 response with a mean
of 2.61 and a median of 2 reveals that getting an assignment done with a better recoverability
rate is considered an important aspect for a better performance appraisal.
In S14 with a mean of 2.87 and a median of 3, the respondents had no opinion about audit
managers delegating tasks based on the standard hourly rate of the auditing team members,
as opposed to the required skills, to accomplish profitable projects and better performance
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appraisal at another stage. These findings highlight the concerns of good allocation
of auditors on different assurance and auditing projects. It should be noted that assigning
auditors just because the hourly standard rate is lower, as compared to other team members,
could cause deficiencies in the quality of auditing. Auditors experience should be taken into
consideration in determining the auditing task to be assigned to them as opposed to their
hourly standard rate as well as the managers view on the project profitability and positive
performance appraisals. Assigning auditors who have the required auditing experience
could lead to less chargeable hours. This helps the auditors to develop expertise on what they
do and spend minimal time as compared to their colleagues, who do not possess the same
level/type of the experience. Following the rightful allocation, which is determined by the
level of skills and required experience, the stated deadline will be beaten, chargeable hours
could be less, and a better performance appraisal could be attained without commitment of
any type of the dysfunctional behavior.

Performance evaluation by experience

Table VI shows the significant differences in responses between audit trainees and
experienced auditors and how their respective behaviors change when they are expecting a
performance evaluation.

Premature sign off differences between audit trainees/experienced auditors

Statements S1 to S7 relate to responses about premature sign-off of audit work, and
statements S8 to S14 are related to under-reporting of chargeable time for audit trainees and
experienced auditors. The objective of this part of the paper is to see if experienced auditor
respondents have a different response than audit trainees. When the difference between the
mean value of the two groups is at 95 per cent (i.e. *p\0.05), this indicates a significant
difference. Only three of the statements showed significant difference between the two
groups. For S2, there was a significant variance in the mean value between audit trainees and
experienced auditors, indicating that audit trainees disagree to a smaller degree that senior
auditors implement less methodology when they are expecting a performance evaluation.
The result in S4 with a p\0.01 indicate that experienced auditors agree that auditors would
tend to prematurely sign-off an audit step. The signing off positively affects auditors
performance evaluation. It is observed that experienced auditors have a belief that receiving
a better performance evaluation is a valid reason for auditors to commit a dysfunctional
 MAJ Experienced
32,2 Audit trainees auditors MannWhitney
Premature sign-off meana mean U p-value

S1. To progress their careers (get promotions) auditors tend

to build, maintain and utilize a network of clients and
internal relationships to achieve better performance rating 1.98 2.02 0.88
226 S2. Strict audit firm methodology is less exercised by senior
auditors in order that they receive positive feedback from
clients 3.21 3.50 0.05*
S3. When there is a risk of losing an audit assignment,
partners tend to compromise rather than comply fully with
audit firm methodology and auditing standards 3.21 2.90 0.10
S4. Auditors tend to prematurely sign-off an audit step
when such sign-off may positively affect their performance
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evaluation 3.23 2.77 0.01*

S5. Audit managers participate in the development of ways
to meet client needs, increase clients portfolio and have
more assignments so that they get better performance from
their superiors 2.26 2.11 0.04*
S6. Partners/directors tend not to report all material control
weaknesses to get assigned at a later stage to a non-audit
assignment 3.36 3.25 0.61
S7. Auditors tend to rely less on subject matter experts
even if the auditors themselves are not highly
knowledgeable in a certain area to maintain a good
recoverability rate 2.87 2.77 0.49
S8. An auditor expecting a promotion may exercise less
professional skepticism if this would harm assignment
profitability 3.30 3.3 0.82
S9. Auditors tend to choose the highest thresholds of
sampling techniques for the sake of achieving a good
recoverability rate 2.89 2.65 0.17
S10. Senior auditors who assist in proposal preparation and
research tend to lower the budgeted hours to increase their
chances of winning a proposal for better evaluation from
their superiors 2.64 2.67 0.94
S11. Auditors are asked to under-report chargeable hours to
achieve a good appraisal 3.57 3.17 0.07
S12. Auditors tend to work in their personal time rather
than actual hours spent to maintain a profitable assignment 2.25 2.22 0.71
S13. Finishing an audit assignment with a good
recoverability rate is one of the most important factors for a
good appraisal and performance evaluation 2.51 2.66 0.76
Table VI. S14. Audit managers delegate tasks based on the standard
Comparative mean hourly rate of every team member rather than the skills
responses between needed for every cycle in order to achieve a good profitable
audit trainees and assignments and consequently better appraisal 2.68 2.98 0.20
experienced auditors/
performance Notes: a 1 strongly agree, 2 agree, 3 no opinion, 4 disagree and 5 strongly disagree; * p\0.05 (Mann
evaluation Whitney U test)
 behavior through signing-off an audit step prematurely. However, the responses of the audit Performance
trainees indicate neutrality to disagreeing with this statement. In this case, the audit trainees evaluation of
believe that auditors do not sign off prematurely on audit steps to get a better evaluation.
Experienced auditors appear to think some auditors to prematurely sign-off an audit step
auditors
when such sign-off may positively affect their performance evaluation leading to
dysfunctional behavior.
S5 is the final area where the two groups have a significant difference in their responses.
The statement relates to the participation level of auditing managers in meeting clients 227
needs and increasing the clients portfolio is perceived more by experienced auditors to have
a significant effect on receiving a better performance evaluation. Because junior auditors
are rarely involved in increasing the portfolio of the clients, it can be justified why there is the
significance variance in responses for this statement. Approaching clients and coming up
with the best methods of satisfying their needs is the main role pertained to experienced
auditors (directors, managers and partners). On the other hand, audit trainees have the
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responsibility of executing and performing the procedures according to experienced

auditors plans.
The significant variance in the mean value in the above three statements represent the
differences in perception between audit trainees and experienced auditors. It can be noted
that no significant variance in the mean values exist for the remaining statements and the
statements related to under-reporting of chargeable time (S8-S14)

Conclusion and recommendations

Audit firms have witnessed a significant change in the operation of the HRM (Brierley and
Gwilliam, 2003). Staff performance appraisals, a large part of the HRM process, are
considered a useful tool in monitoring audit quality. The research on auditors performance
appraisals is limited because of the critical context of such research (Herrbach, 2001). Some of
the recent studies assessed the effects of the review and appraisal methods and the source of
feedback delivered to certain categories of auditors (Dalton and Viator, 2013; Kadous et al.,
2013; Schaefer, 2013; Bamber et al., 2014). The objective of this research is to highlight
whether factors embedded at the Big Four performance evaluation procedures are leading to
dysfunctional behavior acts. This is the first study which uses the same performance
appraisal statements used in the Big Four assessment templates to evaluate audit staff
agreement to a series of statements about behavior in an audit that could change to obtain a
higher performance evaluation.
The findings highlight that professional qualifications have more weight than graduate
degrees to get promoted at the Big Four audit firms. The results also reveal that there are
several actions exercised by external auditors that lead to dysfunctional behavior. To save
on expensed, audit teams may not rely on experts when facing complex sections of the audit.
The respondents believe that auditors consider that such reliance on experts may harm the
assignment profitability on the expense of delivering good audit quality. In another area,
auditors are not reporting all the hours worked on a job to receive good performance
appraisals regardless of the negative impact on the audit of subsequent years. Auditors are
perceived, according to the respondents of the survey, that a good performance evaluation
can only be successfully attained by building, maintaining as well as utilization of clients
network. Accordingly, meeting clients needs and getting involved in increasing clients
portfolio are essential for better performance evaluation. To achieve a bigger client portfolio,
the respondents believe that senior auditors will likely reduce the budgeted time to increase
the opportunities of winning a proposal as well as receiving a good performance evaluation.
Finishing profitable assignments with a high recoverability rates are considered important
 MAJ factors in performance evaluation regardless the tight budgets prepared by experienced
32,2 auditors.
The survey covered all staff levels of auditors (audit trainees, senior auditors, managers,
directors and partners). To understand the differences in less experienced and experienced
staff perception of the statements, the sample is stratified into audit trainees and experienced
auditors. There are some perception differences in the two groups in their understanding of
228 some of the statements that could result in dysfunctional behavior, mainly in applying the
audit methodology and prematurely signing-off a step of auditing. They also had a material
difference in how important it was to meeting clients needs when expecting a performance
appraisal.
This research paper can be used as a tool to aid audit executives to understand and to
minimize potential dysfunctional behavior factors. It would be interesting to conduct this
study on non-Big Four auditors to identify any behavioral differences when individuals are
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working in this environment. Also, this paper is covering factors that are related to the audit
firms only. It is worth studying external factors that may lead to dysfunctional behavior such
as individual characteristics, social norms and demographic backgrounds.

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Further reading
International Standards on Auditing 265 (2010), Communicating Deficiencies in Internal Control to those
charged with Governance and Management, International Federation of Accountants, Geneva.
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International Standards on Auditing 610 (2009), Using the Work of Internal Auditors, International
Federation of Accountants, Geneva.

About the author

Dr Rabih Nehme is an Assistant Professor of Accounting at the Lebanese American University. His
teaching interests include external auditing, financial accounting and advanced accounting. Current
research interests are in the areas of audit remuneration, auditors behavior, performance measures of
external auditors and fraud. He has published in the Journal of Developing areas, Corporate Ownership
and Control and has several papers under review at peer reviewed journals. Dr Nehme was previously
an assurance manager at PricewaterhouseCoopers LLP and a senior auditor at KPMG. Along with his
academic career, Dr Nehme is the Managing Director of a consultancy firm (CERTUS Consultancy)
where he is delivering local and regional workshops related to IFRS, Management Accounting and
Capital Budgeting. Rabih Nehme can be contacted at: rabih.nehme@lau.edu.lb

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