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The purpose of this paper is to examine circumstances under which auditors subordinate their judgment. More specifically, the authors investigate factors associated with auditors’ propensity to accept client-preferred accounting methods that conform to accounting standards but do not faithfully represent the entity’s financial position, financial performance and cash flows.

Based on the theory of planned behavior (TPB), the authors developed a survey that was sent to auditors at a non-Big 4 audit firm.

Main results suggest that auditors tend to agree with a client’s preferred accounting method when they anticipate little fallout from this decision, they believe they can easily justify the method, and they perceive that colleagues, shareholders and creditors would also agree with the decision.

Results benefit auditing standard setters and regulators and are relevant for accounting institutes and audit firms because practitioners can learn about circumstances under which auditors subordinate their judgment.

This study contributes to the audit literature by using the TPB to identify factors associated with auditors’ judgment subordination. In addition, it applies the TPB in a context where a client-preferred accounting method is considered acceptable but is not the most appropriate in light of the audited entity’s specific circumstances.

Prior research provides evidence that, when searching for information to resolve client issues, tax professionals’ search processes are subject to confirmation bias. That is, their search tends to focus on information consistent with client preferences at the expense of attending to information that is contrary to client preferences. Although tax professionals are client advocates, such confirmation bias in information search is problematic because it may lead to systematic upward bias in assessments of the evidential support for client-preferred positions and to overly aggressive recommendations. In addition to their clients, tax staff professionals are also accountable to their supervisors. Therefore, this study investigates whether staff professionals’ confirmation bias in information search is influenced by their supervisor's initial belief concerning whether the client-preferred tax position can or cannot be supported. We predict that confirmation bias will be stronger when the supervisor's belief is consistent with client preference than when it is not. We report the results of an experiment in which 83 experienced tax professionals performed a simulated research task. We manipulated the client's preferred tax position and the supervisor's initial belief in a 2×2 between-subjects design. Our results generally support our hypotheses in a case in which the client recognized a loss. However, when the client recognized a gain, the results do not support our hypotheses. We also find that measures of confirmation bias are positively associated with subordinates’ assessments of the evidential support for the client-preferred position and that evidential support assessments are positively associated with the strength of recommendations for the client-preferred position.

The purpose of this paper is to investigate whether transformational leadership affects auditor objectivity.

The investigation is based on a field survey of 198 practicing auditors employed by audit firms operating in Sweden.

This study finds that transformational client leadership negatively affects auditor objectivity and that the effect is only partially mediated by client identification. Given these results, suggesting that auditors are susceptible to influence by their clients’ perceived exercise of transformational leadership, leadership theory appears relevant to the discussion of auditor objectivity in the accounting literature.

Previous accounting research has applied the social identity theory framework and found that client identification impairs auditor objectivity. However, the effect of transformational client leadership on auditor objectivity, which reflects an intense auditor-client relationship, has been neglected before this study.

There has been much discussion regarding the necessity of moving away from precise (rules-based) standards toward less precise (principles-based) standards. This study examines the impact of the proposed shift by using a controlled experiment to evaluate the influence of rule precision and information ambiguity on reporting decisions in the presence of monetary incentives to report aggressively. Using motivated reasoning theory as a framework, we predict that the malleability inherent in both rule precision and information ambiguity amplify biased reasoning in a manner that is consistent with individuals’ pecuniary incentives. In contrast, consistent with research exploring ambiguity aversion we predict that high levels of ambiguity will actually attenuate aggressive reporting. Our results support these predictions. Specifically, we find an interactive effect between rule precision and information ambiguity on self-interested reporting decisions at moderate levels of ambiguity. However, consistent with ambiguity aversion, we find decreased self-interested reporting decisions at high levels of ambiguity relative to moderate ambiguity. This study should be of interest to preparers, auditors, and regulators who are interested in identifying situations which amplify and diminish aggressive reporting.

The purpose of this paper is to investigate the effect of goals on: auditors' inventory write‐off judgments; the conformity of their judgments (i.e. the degree of consistency between these judgments and the judgments they perceive other auditors will make); and the calibration of their judgments (i.e. the extent to which these perceived judgments agree with actual judgments of the other auditors).

An experiment was conducted in which 92 auditors are assigned either an accuracy goal, a goal to get along with the client, or a combined accuracy and get along goal (i.e. both goals), and are asked to make an inventory write‐off judgment.

Consistent with expectations, auditors with accuracy goals are more likely to recommend a write‐off of inventory than auditors in the other goal conditions; and auditors with both goals are more likely to recommend a write‐off than those with the get along goal. Also, while auditors' judgments are well calibrated, mixed evidence of conformity is found.

Goals may be a tool which audit regulators and practitioners could use to enhance audit effectiveness. In addition, the interactive audit environment may contribute to auditors' well calibrated judgments but judgment conformity may require more (such as accountability or incentives) than knowledge of other auditors' judgments.

This is the first paper to examine the impact of explicit and competing goals on the calibration and conformity of auditors' judgments.

This paper aims to conduct an experiment that investigates the effect of the ambiguity present in international financial reporting standards (IFRS) on the judgments of auditors. This paper also examine the effects of the personality trait of ambiguity tolerance on judgments of auditors.

This paper conduct an experiment in which experienced Australian-based auditors are placed in hypothetical revenue recognition and lease classification decision contexts. The participants are members of the Australian accounting profession who are familiar with applying IFRS.

This paper find support for the perception that when the relevant IFRS are more ambiguous, auditors make less aggressive reporting judgments compared to when the IFRS are less ambiguous. The results also unveil a novel finding that auditors who are more tolerant of ambiguity are likely to choose the accounting treatment that best reflects the economic substance of a transaction when interpreting IFRS compared to those who are less tolerant of ambiguity.

These results would be of interest to policymakers and accounting researchers as they continue to contemplate a shift to more principles-based IFRS.

To the best of the authors’ knowledge, this study is the first to examine the influence of an individual’s ambiguity tolerance on financial reporting quality in jurisdictions that have adopted IFRS.

We investigate auditor objectivity as it relates to engagement quality reviews by examining whether engagement quality reviewers (EQRs) exhibit lower levels of objectivity when they have administrative, economic, or social ties with the audit engagement partner. Motivated reasoning theory suggests that EQRs with ties to the engagement partner will reach less conservative conclusions and be more willing to accept an engagement partner's decision relative to reviewers who have no connections with the engagement partner. We conduct an experiment where EQRs must review a decision by an engagement partner related to a contingent liability.

Results suggest that engagement quality reviews are an effective mechanism for reducing the effects of engagement partner biases to accept client-favored accounting choices. Participants with ties to the engagement partner (i.e., from the same office) and without ties (i.e., from the national office) both challenged the decision of the engagement partner and recommended disclosure of a contingent liability, which client management opposed. We also find an interaction of ties with the engagement partner and the probability of the contingent liability. National office EQRs were less likely to decide that disclosure was necessary than were local office partners when the probability of the contingent liability was low. With regard to the need to recognize a liability, EQRs with and without ties to the engagement partner concurred with the decision of the engagement partner.

The purpose of this paper is to examine the joint effect of supervisor influence and investor perspective on novice auditors’ assessments of accounting estimates.

The experiment used a 2 × 2 between-subjects design, randomly assigning proxies of novice auditors among four conditions. The authors manipulated the supervisor’s level of emphasis on evidence that suggests accounting estimate adjustment and whether auditors are prompted to take an investor perspective. Participants were asked to assess the misstatement risk of the allowance for doubtful accounts of the client company.

The authors find that auditors assign a higher (lower) risk of misstatement when their supervisor places high (low) emphasis on evidence suggesting accounting adjustment. The authors also find that contrary to the belief that taking the perspective of investors could enhance objectivity and independence, investor perspective leads to a decrease (rather than an increase) in auditors’ perceived risk of misstatement when the supervisor places low emphasis on evidence suggesting accounting adjustment.

This study provides early evidence on the efficacy of investor perspective and is one of the first to document an unintended consequence of asking auditors to take an investor perspective.

This study documents that an outcome-favorable bias is greater when the quantity of information describing a balanced tax-decision context is substantially increased. Second, the study demonstrates that an outcome-favorable bias can be offset by the use of principles-based ethical standards. Specifically, we examine the effect of AICPA Code of Conduct Section 54 for integrity and Rule 102-6 for advocacy. Students volunteered to participate in this study examining the manner in which accounting novices initially process principles-based standards. Prior studies using student subjects in an audit setting have found that principles-based standards were effective only when students had high levels of moral reasoning (Herron & Gilbertson, 2004), and rules-based technical standards had no impact on student subjects when making financial adjustments (Pflugrath, Martinov-Bennie, & Chen, 2007). If professional standards increasingly rely on principles-based standards, then understanding the impact of such standards on future entrants into the profession would provide guidance in the creation and implementation of future standards, as well as assist educators in the development of accounting curricula. We extend the pattern of past research to a tax setting and show that tax-saving recommendations are a function of the presence of a professional standard and the level of contextual detail.

The purpose of this paper is to investigate the effect of performance feedback and client importance on auditors' self‐ and public‐focused ethical judgments.

An experiment is conducted in which 71 auditors are assigned to one of four conditions created by fully crossing performance feedback (positive and negative) and client importance (high and low).

Consistent with expectations, auditors who receive positive (negative) feedback make more (less) ethical judgments in a self‐focused task (a judgment that produces consequences that are relevant for the auditor). Auditors also make more (less) ethical judgments in a public‐focused task (a judgment that has consequences for both the auditor and the public) when auditing a less (more) important client. Finally, auditors who receive positive feedback and audit a less important client make more ethical judgments in both tasks than all other auditors.

These findings suggest that auditors are susceptible to pressures from negative feedback and client importance, even in situations where their decisions will have public consequences, despite regulatory changes intended to enhance audit quality.

This is the first paper that provides evidence that different sources of pressure (performance feedback and client importance) differentially affect ethical tasks differing in decision consequences (self‐ and public‐focused). Such evidence suggests the importance of matching pressure source to ethical task type.