The impact of audit risk, materiality and severity on ethical decision making

Rex Marshall (School of Business, Murdoch University, Murdoch, Australia)
Malcolm Smith (School of Accounting, Finance and Economics, Edith Cowan University, Joondalup, Australia)
Robert Armstrong (School of Management and Marketing, University of North Alabama, Florence, Alabama, USA)

Managerial Auditing Journal

ISSN: 0268-6902

Publication date: 1 June 2006



The purpose of this paper is to focus on the role of the tax agent as a preparer of tax returns and provider of professional tax advice under a system based on self‐assessment principles. It recognises the competing pressures under which tax agents attempt to discharge their professional responsibilities, and examines the implications for potentially unethical behaviour.


The paper uses a mail survey of tax professionals in Western Australia. Respondents are presented with realistic tax return scenarios, in which the demands of the client are varied according to the risk of audit, the severity of tax law and the materiality of dollar amounts involved.


The findings suggest that the severity of tax law violation is an important factor in ethical decision‐making, but that audit risk and the amounts involved are not.

Research limitations/implications

The lack of support for audit risk as an influential variable is an important outcome, because policy makers have traditionally proceeded on the basis that increases in audit probabilities will reduce the likelihood of taxpayers adopting aggressive tax reporting positions. However, since the findings are based on an Australian sample, care must be taken in generalizing these findings elsewhere.

Practical implications

The implications are important in that alternative enforcement and compliance strategies must be considered by tax administrators.


The paper extends empirical research into taxpayer attitudes to those of the preparers of tax returns. The findings will be of relevance both to tax agents and to tax administrators.



Marshall, R., Smith, M. and Armstrong, R. (2006), "The impact of audit risk, materiality and severity on ethical decision making", Managerial Auditing Journal, Vol. 21 No. 5, pp. 497-519.

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Copyright © 2006, Emerald Group Publishing Limited

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