Ethical team leadership and trainee auditors’ likelihood of reporting client’s irregularities

Abstract

Purpose

This paper aims to investigate the impacts of audit engagement team’s ethical leadership, trainee auditors’ reporting intent and other selected factors on their likelihood of reporting client’s irregularities.

Design/methodology/approach

The present investigation is based on 150 effective questionnaire responses provided by a group of trainee auditors working for certified public accounting (CPA) firms. The questionnaire items relating to trainee auditors’ likelihood of reporting client’s irregularities are based on Crawford and Weirich’s (2011) classification of common forms of fraudulent financial reporting. The authors’ measurement of the audit engagement team leaders’ ethicality is based on the ethical leadership scale developed in Newstrom and Ruch (1975) and Kantor and Weisberg (2002). Regression models are used to testify the authors’ hypotheses on the correlations of the trainee auditors’ likelihood of reporting client’s irregularities with audit engagement team’s ethical leadership, trainee auditor’ reporting intents and other selected factors.

Findings

The major conclusion of this study is that there is a significantly positive correlation between trainee auditors’ likelihood of reporting client’s irregularities and their perception of audit engagement team leader’s ethicality. This paper also points out that trainee auditors’ higher evaluation of stable firm–client relationship reduces their likelihood of reporting client’s irregularities, whereas their concerns with future career development increase the likelihood of reporting. In addition, this paper documents the fact that male trainee auditors more easily perceive the ethicality of their team leader than females, and that trainee auditors with less academic achievements (lower GPA) tend to perceive more easily the ethicality of their team leader than those with better academic achievements (higher GPA).

Research limitations/implications

Two business ethics variables constructed and used in this study, i.e. trainee auditors’ likelihood of reporting client’s irregularities and engagement team leader’s ethicality, can be applied in future research on whistleblowing in the audit profession.

Practical implications

Practical implications can also be drawn from the findings to enhance the ethical management at both engagement and firm levels.

Originality/value

This paper contributes to the audit research literature by providing evidence on the significant positive impacts of team leader’s ethicality on the entry-level audit professional’s likelihood of reporting client’s irregularities.

Citation

Liu, G. and Ren, H. (2017), "Ethical team leadership and trainee auditors’ likelihood of reporting client’s irregularities", Journal of Financial Crime, Vol. 24 No. 1, pp. 157-175. https://doi.org/10.1108/JFC-02-2016-0012