This thesis is submitted as partial fulfillment for the award of Bachelor of Arts in
International Business Management
Behavioral Aspects in Accounting
and their Impact on the Auditing Process
Katrin Wittke
Student No. 271363
First Supervisor: Prof. Dr. Nadja Jehle
Second Supervisor: Prof. Dr. Madeleine Janke
19/08/2013
15.780 words
Katrin Wittke
International Business Management
Table of Contents
List of Tables........................................................................................................................ iv
List of Figures ........................................................................................................................v
List of Abbreviations............................................................................................................ vi
Affidavit .............................................................................................................................. vii
Introduction ............................................................................................................................8
1.
Literature Review .........................................................................................................10
1.1 Behavioral Accounting ...............................................................................................10
1.2 Behavioral Aspects in Auditing .................................................................................11
2.
Developments in Rational Thinking ............................................................................13
2.1 Homo economicus - Origins, Adaptations, Criticism ................................................13
2.2 Innovative Concepts of Human Behavior ..................................................................16
2.3 Developments in Organizational Theory ...................................................................19
3.
Selected Aspects of Organizational Behavior ..............................................................23
3.1 Judgment and Decision-Making .................................................................................23
3.2 Cognitive Fallibilities in Accounting and Auditing ...................................................24
3.2.1 Availability..........................................................................................................25
3.2.2 Adjustment and Anchoring .................................................................................27
3.2.3 Confirmation bias ................................................................................................29
3.3 Control, Incentives and Their Effects on Behavior ....................................................32
4.
From The Auditor’s Perspective ..................................................................................35
4.1 Auditor Independence – Where Do Loyalties Lie? ....................................................35
4.2 Measures to Ensure Audit Quality .............................................................................37
5. Survey – Behavioral and Environmental Influences on Auditing Processes ...................39
5.1 Research Objectives ...................................................................................................39
5.2 Research Design and Method .....................................................................................39
5.3 Findings & Analysis ...................................................................................................42
Conclusion ...........................................................................................................................53
ii
Katrin Wittke
International Business Management
List of References ................................................................................................................54
Appendix ..............................................................................................................................59
A.
Prospect Theory Formula and EUT Formula ........................................................59
B.
Survey Outline .......................................................................................................59
C.
Distribution of respondents by age ........................................................................64
D.
Positions held by respondents within the firm ......................................................64
E.
Distribution of size of audited firms .....................................................................65
F.
Cross tabulation: Team size and audit firm size ...................................................65
G.
Frequency of answers on atmosphere ...................................................................66
H.
Preciseness and Atmosphere .................................................................................67
iii
Katrin Wittke
International Business Management
List of Tables
Table 1: Active employment in the industry ......................................................Page 41
Table 2: Distribution of team size ......................................................................Page 43
Table 3: Cross tabulation between firm size and perceived degree of involvement in
planning process ..................................................................................Page 46
Table 4: Cross tabulation between firm size and perceived degree of involvement in
planning process ..................................................................................Page 47
Table 5: Frequencies for question 11: preciseness of audit tasks ......................Page 48
Table 6: Cross tabulation deadline quality and negative atmosphere ................Page 49
Table 7: Cross tabulation preciseness and quality .............................................Page 50
Table 8: Cross tabulation: Frequency of sample adaptations and audit quality .Page 51
iv
Katrin Wittke
International Business Management
List of Figures
Figure 1: Work Experience by Firm Size ..........................................................Page 42
Figure 2: Firm size and positive characteristics of atmosphere .........................Page 44
Figure 3: Firm size and negative characteristics of atmosphere ........................Page 45
Figure 4: Frequency of sample size adaptation in large and small audit firms ..Page 50
v
Katrin Wittke
International Business Management
List of Abbreviations
BAR
Behavioral Accounting Research
e.g.
Latin: “exempli gratia” (English signification: “for example”,
“such as”)
EUT
Expected Utility Theory
i.e.
Latin: “ita est” (English signification: “this means”
JDM
Judgment and Decision-Making
PCAOB
Public Company Accounting Oversight Board (PCAOB)
SEM
Standard Economic Model
SOX
Sarbanes-Oxley Act of 2002
vi
Katrin Wittke
International Business Management
Affidavit
I declare that I wrote this thesis independently and on my own. I clearly marked any
language or ideas borrowed from other sources as not my own and documented their
sources. The thesis does not contain any work that I have handed in or have had graded as
a Prüfungsleistung earlier on.
I am aware that any failure to do so constitutes plagiarism. Plagiarism is the presentation of
another person's thoughts or words as if they were my own—even if I summarize,
paraphrase, condense, cut, rearrange, or otherwise alter them. I am aware of the
consequences and sanctions plagiarism entails. Among others, consequences may include
nullification of the thesis, exclusion from the BA program without a degree, and legal
consequences for lying under oath. These consequences also apply retrospectively, i.e. if
plagiarism is discovered after the thesis has been accepted and graded.
My name:
Katrin Wittke
Title of my thesis:
Behavioral Aspects in Accounting
and their Impact on the Auditing Process
Date: 19/08/2013
Signature: _________________________
vii
Katrin Wittke
International Business Management
Introduction
The worlds of accounting and auditing are ruled by hard facts and numbers. How does the
idea of motivation and irrational behavior fit into such a world?
If the models that are in place today are built on the idea of homo economicus, where does
an actual human being fit in?
In a world controlled by numbers, cost- and benefit analyses and ruled by the cold-hearted
goal of profit maximization, the behavioral movement has taken it upon itself to create a
space for homo sapiens. The idea of economic man as a rational human being has been
challenged with such force that it has spawned new organizational theories, novel
definitions of rationality and an overall new look on nearly all aspects of behavior.
Internal financial reporting represents a necessary and significant process in and of itself,
but, especially for large firms that are listed on stock exchanges and small firms that
voluntarily present their financial information to financial investors, it has become an
integral part of everyday business life. The function of the auditor and its role in the
process of a financial (external) audit become inextricably linked to the reporting system of
the organization that is being audited, at least for the duration of the audit. Therefore, when
examining human behavior, it is indispensable to regard both sides of the coin – the
preparer of financial information and the auditor.
This makes the combination of accounting and auditing a unique field of study with myriad
possibilities for conflict and unconscious cognitive processes which influence everyday
life.
The aim of this thesis is to examine the way that the view of human behavior in accounting
has developed over time and to analyze in what way these findings apply to and influence
the auditing process.
First, the evolution of the view of rationality and behavior in economics and accounting
will be retraced in order to understand the basis of classical theory and the developments of
the behavioral view. The influence of behavioralist perspective on aspects of decision
making, organizational theory and sociological aspects will be presented and the
consequences on management, accounting and auditing will be discussed. Starting always
from the accounting side, the impact of behavioralist approaches on financial systems in
organizations demand a new look. Finally, after examining selected aspects of auditor
8
Katrin Wittke
International Business Management
behavior, performance and audit quality, the study which was conducted to to examine
whether the changes on auditing that were discussed find their way into actual auditing
processes will be presented and its results analyzed.
The thesis concludes with the discussion of the theoretical and practical implications of the
results.
9
Katrin Wittke
International Business Management
1. Literature Review
The following literature review will give an overview of the developments in Behavioral
Accounting Research (BAR) over the last sixty years as well as of the more specialized
research area of behavioral aspects of auditing.
1.1 Behavioral Accounting
Ever since the inception of economics, man has been viewed as a rational human being.
This view has its origin in the works of John Stuart Mill and followed the general
characteristics which Adam Smith already outlined in The Wealth of Nations (1776,
reprinted in 1991).After its inception the concept has been embraced by economists and
was developed further over the following decades. Its evolution will be outlined in section
2.1 Homo economicus.
Criticisms of the theory of homo economicus, as the rational man has been called shortly
after his inception, have started to arise towards the end of World War II. Starting with
criticism of the idea of unlimited cognitive abilities by Herbert A. Simon, over the years
experiments brought to light a multitude of characteristics of homo economicus which were
not accounted for by the classical model. It became clear that this model was not able to
accurately represent reality. Gradually, through the development of the principle of
bounded rationality by Simon (1964), neoclassical economic theory was extended by the
inclusion of elements of psychology, marking the birth of behavioral economics. More
dramatic changes were made when the behavioralism movement gained momentum in the
1960s and almost immediately swept over to include accounting, auditing, finance and
finally, investment.
In the 1970s, researchers like Hofstedt (1976) and Birnberg and Nath (1967) have
attempted to draw a preliminary result from the explosive growth in BAR, with the latter
authors having correctly predicted a profound increase in interest in behavioral aspects of
budgeting processes and control systems.
Up to the point in time when Hofstedt (1976) attempts an illustration of the state of BAR,
the focus has mostly lied upon such topics as controlling and judgment and decisionmaking (JDM), but the theories and paradigms have not been formulated to a degree where
they could be molded into all-encompassing theories. While internal accounting and
controlling already had enjoyed a high degree of attention by scholars which resulted in a
large body of research, external financial reporting and auditing had not been put under the
10
Katrin Wittke
International Business Management
behavioral microscope with as much scrutiny. A major concern of Hofstedt’s was that
research mainly occurred on the academic side and lacked input from the practical side,
indicating a possible absence of interest of practitioners. He feared that the reconciliation
between academics and practicing accountants, specifically the practical adaption of
theoretical results, would be hindered if the transition from theoretical research into
practice would not improve (Hofstedt 1970, p. 41 f)
Colville (1981) has offered a detailed look at the connection between accounting and
organizations, and attempted to predict what the implications of a behavioral view of
accounting would be for the organizational aspects of society. He suggests a reciprocal
exchange between organizational theorists, behavioral researchers and sociologists in order
to ensure that the organization is not examined without giving the individual his due place
in it. A similar link between accounting and organizational theory was also drawn by
Covaleski and Aiken
(1968),
which has been deemed “an excellent synthesis of […] two
literatures whose intersection has not been subject to systematic review” by esteemed
researcher Jacob Birnberg (1986).
In the following two decades researchers began to focus on several specialized aspects,
such as cognitive processes and other specific auditing topics. As Bamber (1993) noted, a
general focus on managerial accounting remained, while emphasis shifted to information
processes by decision makers. This view has been confirmed in an empirical analysis of
the articles published in Behavioral Research in Accounting during the 1990s by Meyer
and Rigsby (2001). The two authors found that the focus on research still relied on three
core schools, namely managerial control systems, accounting information processing and
audit (p. 255 f)
1.2 Behavioral Aspects in Auditing
Considering behavioral aspects in auditing, Shields (2009) argues that a significant impetus
which jumpstarted research in auditing was the Research Opportunities in Auditing
program, funded by KPMG in 1976. A first study on the topic of auditor judgments was
conducted by Ashton only two years prior, in 1974 (Trotman 2011, p. 203). As was the
case in BAR during this period, studies in auditing focused heavily on cognitive issues and
judgment and decision making. Knechel (2000) proposes that the reason for the surge in
JDM research lies in the fact that auditing “is inherently a judgment process" (p. 695). This
viewpoint was supported by Gillenkirch and Arnold (2008) who gave a very broad and
concise overview of the state of research up to the publishing date. Trotman (2011) offers a
11
Katrin Wittke
International Business Management
more personal chronological overview of the literature on audit judgment and decision
making in his aptly called article “A Different Personal Perspective through the Behavioral
Accounting Literature”, which is supposed to be regarded as a counterpart to the overview
of management accounting literature by Shields. He confirms that the developments by
Kahneman and Tverksy in the field of biases and heuristics as well as investigations into
the role of memory and other cognitive approaches had a strong impact on the research
field. The author also points out that while during the 1990s focus lay mainly on elements
influencing the auditor’s judgment performance, such as time pressure and accountability,
the arrival of new auditing standards and the implementation of the business risk approach
influenced the direction of research in the new millennium and steered it towards betweenauditor interactions. Trotman also predicts that possible directions for the future might
influenced by further “[c]hanges in regulation and audit processes” which offer new
opportunities for experiments (Trotman 2011, p. 205)
12
Katrin Wittke
International Business Management
2. Developments in Rational Thinking
Over the last five decades, economists and academics with a background in psychology
have begun to move away from the thitherto generally accepted idea of the rational person
and developed more realistic concepts of human behavior. In the following sections, after
an overview of the development of homo economicus, selected concepts of behavioral
theories will be presented. Then, the judgment-oriented approach as well as the
convergence of organizational and behavioral theories will be examined.
2.1 Homo economicus - Origins, Adaptations, Criticism
For more than a century, the concept of homo economicus represented the foundation of
economic thought, yet there is still dissonance among economists and researchers about
where the model originated. While there is overall agreement that the general
characteristics of what would eventually become a well-developed framework can be
found in Adam Smith’s works, specifically in The Wealth of Nations (1776, reprinted in
1991), it is debatable whether it was Leon Walras, Eduard Spranger or John Stuart Mill
who defined the concept. As Joseph Persky notes in The Ethology of Homo Economicus
(1995), the economist and philosopher John Stuart Mill is usually credited with
formulating the more detailed characteristics in 1848, and the term homo economicus was
derived in reaction to his work. As we shall see, the evolution of homo economicus over
the 20th century was marked by heavy criticism from the sociologists and earned outright
denunciation by advocates of the behavioralism movement. The cornerstones of this
development and their implications on related fields of studies will be discussed in detail.
In Adam Smith’s works, the - at the time - nameless economic man was described as a
self-loving or self-interested individual which pursues maximum utility, or welfare in any
given situation (Smith 1776, reprinted in 1991). This general idea was developed further
by Mill (1848, reprinted in 2012) until it became a highly detailed model of a rational
human being. Karafyllis (2002, p. 19) argues that a person can be described as rational
when she chooses the alternative which, given her overall objectives, opinions and values
as well as the underlying conditions, promises to fulfill her goals in the optimal way. Other
criteria for rationality which can be applied to attitudes and preferences are their adherence
to logic and probabilities, the fact that they should be coherent, i.e. stable and consistent,
13
Katrin Wittke
International Business Management
be based on relevant and material factors and must not be in conflict with empirical facts
and observations known to the choosing person (Wilkinson 2008, p. 391).
Over the following decades the view of rational man evolved through discussion and
reinterpretation into a “rational self-interested utility maximizer” (Wilkinson 2008, p. 11),
while the degree of assumed selfishness varies strongly among researchers. While many
interpreted the classical “Butcher statement“1 from Smith’s Wealth of Nations (1776,
reprinted in 1991) as a sign of selfishness, others suggested that Smith’s earlier work, the
Theory of Moral Sentiments (1759, reprinted in 1977), gives more insight into the
relationship of homo economicus with his environment and definitely describes him as
pursuing his “self-interest with sympathy for others and within the moral system of
society” (Altman 2006, p. 7). Even though this misunderstanding is widely settled today
with the latter view prevailing, some critics still believe the selfish aspect of homo
economicus provides reasonable ground for criticism.
The reason why homo economicus was so beloved by those who would become
representatives of neoclassical economics was because of the characteristics that were
assumed. In the neoclassical view, homo economicus was endowed with “full information
and unlimited information-processing capacity” (ibid., p. 238), with which he was able to
analyze the costs and benefits of any given situation to come to the most utile decision.
This model of a rational man offered a simplicity that allowed economists to make
predictions which were thought to represent actual patterns of behavior and could be used
to rationalize these actions (Frerichs 2011, p. 298). This aspect of homo economicus was
necessary for the functioning of neoclassical economic models of equilibrium and supply
and demand. However, there are numerous examples of proponents of neoclassical
economics and economic man that did not turn a blind eye to the inherent flaws of this
model2. While they conceded that a generalization in the form of patterns is necessary in
order to depict the complexity of human emotions that affect decision making behavior,
critics of rational economic man disagreed with several main points of the concept, the
basic tenet of the argument being that the model was reflecting real human behavior.
One point of criticism was the fact that social relationships are not included in the
neoclassical model. Homo economicus is thereby effectively separated from his
environment, and the only influences that theoretically guide his behavior are those of
1
2
"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from
Among the Milton Friedman and, of course, Herbert A. Simon.
14
Katrin Wittke
International Business Management
prices, changes in income and other economic variables (Steele 2004). In this view,
fundamental aspects of humanity such as values, beliefs and social interrelationships are
effectively ignored by neoclassical economics.
Another important aspect of criticism which relates to the incongruence with reality lies in
the assumption of complete information and processing capabilities. The most
comprehensively developed criticism of this postulate was provided by Herbert A. Simon
(1964), who, in the search for a more realistic model, developed the concept of bounded
rationality. Even though Simon agreed that man is a “social and rational animal” (ibid.,
p. vii), he argued that, due to our limited powers of comprehension, humans can only
process a small amount of information at once. The idea of omniscience and unlimited
intellectual capacities is hence unrealistic and will lead to improbable outcomes when the
situation becomes too complex or the individual factors are uncertain (Simon 1964).
A further issue which psychologists and especially sociologists took with the idea of homo
economicus was the characteristically egoistical nature of such a rational being that is
intent on maximizing its own welfare, regardless of the needs of others (Põder 2006, p.
10). However, the view of a selfish homo economicus was heavily misinterpreted from the
aforementioned “Butcher statement” by Smith (Alterman 2006, p. 7). One can argue,
nevertheless, that the welfare of others is only increased either as a by-product of the
decisions that a rational human being makes or because of the self-interested strive for
acceptance by others (Jasay 2011).
When it comes to the main point of critique, namely the closeness to reality of the model
of homo economicus, the opinions differ widely. While some argue that anomalies reflect
irrational behavior that is out of the norm and should therefore not be included in the
model, others argue the exact opposite: They suggest that rational economic man “does not
exist, has never existed” (Vasek 2012), and a model based upon homo economicus does
not reflect the behavior of homo sapiens. According to the behavioralist view, human
beings are irrational and do not always behave in their own optimal self-interest. Therefore
a model which is designed to predict human behavior should take this important aspect of
humanity into account. In short, when the model does not reflect reality, the assumptions
about humans should not be changes, but instead the model should be adapted (Altman
2006). Behavioral economics, in combination with psychology, aims at explaining those
anomalies through adaptations of the assumptions of human rationality, and will be
described further in the next section.
15
Katrin Wittke
International Business Management
Others brought forward the counter-argument that the benefits of a simplified model of
human behavior greatly outweighed the shortcomings of a more realistic model (Sen 1977,
p. 335 ff.) which would have to be as individualized as the great number of different social
norms and roles. They claim that the idea of homo economicus is merely an approximation,
a hypothetical construct to be used as an aid to depict behavior of humans and market
mathematically and was never meant to be more. The desire of economics to be more like
natural sciences demanded mathematical models, clear assumptions about actors and
conditions, as Heuser (2008) argued. This “mathematization” of economics required a
simplified model of man (Guckelsberger 2005). As Steele notes in his article
“Understanding
Economic
Man”,
by
employing
mathematical
approximations
inconsistencies and ambiguities can be brought to light and, as he argues, “[i]ts very
usefulness lies in its contrast to reality”. (Steele 2004, p. 1030)
At this point, it is important to note that while simplicity may be desirable, disregarding
empirical evidence which strongly suggests that basic human instincts and behaviors are
not perfectly rational cannot lead to an accurate model of markets that consist of the sum of
those behaviors. In the following section, selected areas of research and corresponding
theories will be discussed, since their observations identified aspects of human behavior
which acutely contradicted those of homo economicus and could no longer be ignored.
2.2 Innovative Concepts of Human Behavior
Even though empirical evidence was gathered after the end of World War II which
contradicted the standard economic model and its view of rationality, economists were still
reluctant to alter their model of homo economicus in a drastic way. In order to account for
some of the fallibilities, Herbert A. Simon (1964) pioneered the idea of bounded
rationality with which he aimed to adapt the neoclassical model into a concept that would
represent actual human behavior.
Simon argues that in neoclassical theory, the assumptions that are made about economic
man do not give detailed information about his psychological characteristics, offering only
the description of a rational human being that is intent on maximization of utility. He
acknowledges the traditional view of economic man as a powerful tool, yet in order to
apply the theory to actual behavior of humans that is observed, the aspect of “global
16
Katrin Wittke
International Business Management
rationality” (Simon 1964, p. 241) has to be adapted to make it more realistic. It is
important to point out that Simon does not dismiss neoclassical theory in its entirety.
In the core of the theory of bounded rationality stands the idea that people neither have
perfect information nor the cognitive abilities and resources to calculate the probabilities of
every choice available to them and their respective results. Instead of optimizing their
choice, Simon claims that they tend to “satisfice”, i.e. they do not necessarily look for the
best outcome, but the one that is acceptable in that situation by simplifying the choices
available to them. In his collection of essays, Models of Man, Simon (1964) describes the
individual computing mechanisms that would be involved in the process of maximization
of utility (p.241). They include the comparison of alternatives, their relative pay-offs and
the ordering of preferences of these payoffs. All of these factors are taken into account to
achieve the best solution. He claims that the results of these calculations under
psychological limits, specifically “with respect to computational and predictive ability […]
can at best be an extremely crude and simplified approximation” (Simon 1964, p. 243). In
order to save figurative computing power, humans tend to make use of so-called
computational shortcuts, or heuristics. They can be described as rules of thumb and are
necessary to derive approximate results from a complex situation with masses of
information and with the cognitive capacities available to them. For instance, instead of
being able to predict pay-offs of all possible outcomes and ordering them by preference,
Simon developed simplifications of pay-off functions. In this proposed approach, decision
makers would categorize potential outcomes into two categories, satisfactory or
unsatisfactory, and search for the behavioral alternative which would be most satisfactory.
This involves a process of ordering and partial ordering of the pay-offs, which, in order to
comply with the scope of this thesis, will not be described in detail. Simon points out,
however, that the proposed process is drastically simplified and hence less complex than
the assumed computations proposed by neoclassical economists. Before moving on to
explain the next stage in the development of behavioral theories, it is important to point out
that Simon’s hypotheses were not based on “empirical knowledge of the decisional
processes”, since they were not examined at that point in time, but instead rest upon
common experience (Simon 1964, p. 246). This approach to human behavior, particularly
when it comes to biases and the uses of heuristics, however, has since been picked up by
several researchers and been proven in experiments and studies.
17
Katrin Wittke
International Business Management
As empirical examples of violations of rationality began to accumulate 3 an answer needed
to be found to explain how irrationality would fit into the view of homo economicus.
Opinions differ widely among researchers whether the standard economic model actually
aims at depicting real human behavior or whether it is merely a simplifying tool used for
predictions, and hence should not be held up to such high standards. A point where
disagreement generally subsides however is the fact that standard economics “seems to
suggest that empirical ‘anomalies’ indicate human failures (such as a lack of rationality)
and not model failures” (Frerichs 2011, p. 293), when the reverse seems to be true, since
there exist alternative models which are able to account for many of the observed
anomalies.
Some of the more well-known experiments and related papers that started to propose
alternative theories to the standard economic model were those by Kahneman and Tversky
(1979), and Thaler (1980), the former having introduced the so-called prospect theory. It is
a nonconventional theory, meaning it is an alternative to the concepts which assume utility
maximization (Wilkinson 2008, p. 98).
The goal of this descriptive theory was not to model how people should act, but to depict
how they actually behave and disregards the idea of perfect rationality. In particular, it
aimed at explaining the anomalies which the SEM, specifically the Expected Utility
Theory (EUT), failed to account for. Prospect Theory presented a new way to account for
cognitive biases and seemingly irrational behaviors which became apparent in
experiments. Specifically, the adapted EUT proposes that people employ a decisionweighting mechanism when evaluating several alternatives.
The adapted utility formula (see Appendix A) incorporates four elements through which
these anomalies can be explained. These four elements are: reference dependence, loss
aversion, diminishing sensitivity and probability weighting (Barberis 2013, p. 175). In
order to remain within the boundaries of this thesis, the formula will not be discussed in
detail. The importance lies especially in the ways in which the formula has been used by
Kahneman and Tversky, for example as a way to modernize the decision making process.
Most importantly, the authors pioneered the novel concepts of framing and endowment
effects and other cognitive biases in subsequent research, all of which have been developed
further through studies and are now considered well-known cognitive biases. Through
3
Experiments which fostered further studies were developed by such innovative thinkers as Allais and, of
course, Tversky and Kahneman
18
Katrin Wittke
International Business Management
these, economists were now capable of behavior in financial markets and everyday
economic actions in a more realistic way. A selection of these biases and cognitive
fallibilities and their potential impact on management accounting processes, auditing
processes and organizational behavior will be presented in more detail in the third main
section of this thesis. Beforehand, it is important to examine the predominant theories in
organizational behavior and its connection with accounting.
2.3 Developments in Organizational Theory
With the advent of trade, manufacturing and industrialization, the organization has
become an integral part of society. It is where individuals spend a significant amount of
their time and energy, which they exchange for money or other inducements. In this
section, an overview of the organization and its relationship with accounting will be given.
An organization can be described as “a social system that is created to achieve certain
specific goals or objectives” (Riahi-Belkaoui 2002, p.18). Caplan (1968) offers an
overview of the differences between traditional and modern organizational theory in detail.
Born out of the necessity to organize a large amount of people and keep them motivated as
a result of industrialization (Caplan 1966, p. 500), organizational theory in its traditional
form incorporated the basic ideas of rationality and classical economics. The goals of the
organization are inherently the goals of the main decision maker, since the organization
itself is not a sentient being. The goal of the decision maker is assumed to be profit
maximization and, in turn, cost reduction. He, the entrepreneur, chooses among several
available alternatives concerning the combinations of factors of production to produce
corresponding outputs. Thanks to perfect information and complete rationality the decision
maker can analyze costs and benefits of the different combinations of factors of production
in a way to maximize profit (Simon 1964, p. 171). In fact, behavior in the traditional model
is assumed to be bias-free.
In this original theory of the firm, or “F-theory”, as Simon called it, the rational individuals
are inherently driven by the desire for utility maximization. The goal of management, next
to profit maximization, is to “secure effective participation” (Caplan 1966, p. 502) from the
individuals in the organization. This is done in part by a mix of economic rewards and
punishments, and through authoritative control from above. He goes on to describe their
reasons to enter an organization as purely instrumental (Simon 1964, p. 166). Individuals
19
Katrin Wittke
International Business Management
are assumed to regard work as an unpleasant task which they try to avoid, and are hence
even considered “lazy”. Once the individuals have entered an organization, they become
passive instruments (Caplan 1966, p.500). Since the assumptions about behavior of
participants are extremely limited in the traditional view, more faceted motivations which
go beyond economic incentives and could lead to a more optimal functioning of
organizations are almost entirely ignored. This failure to take the needs of individuals into
consideration has been shown to lead to frustration and conflict, mistrust and hostility in
organizations (ibid., p. 506).
These limited assumptions about individual goals and motivation make the traditional
model a very simple one, with a much more uncomplicated view of behavior than the more
modern model which will be presented next.
In contrast to this traditional theory of the firm, the organizational decision-making
perspective, or O(rganizational)-Theory has been developed on the basis of behavioral
assumptions which correspond with Simon’s principle of bounded rationality. This model
is shaped by assumptions about communication and decision making of the individual
participants, and has been shaped by March and Simon (1958).
One of the main differences between the traditional model and the decision-making
approach to organizational theory lies in the assumption of goals of individual participants.
Unlike the rational man in F-theory, who has “no place in the theory of organization”
(Simon 1964, p. 198), the individuals under modern organizational theory join
organizations to reach personal goals. They do not merely consist of economic incentives,
but also of social and psychological aspects. Similarly, in response to criticisms that the
singular goal of profit maximization is unrealistic and does not reflect actual organizations,
the goal of the organization in modern theory is assumed to be less one-sided. One of the
proposed goals is organizational survival, which can include more faceted objectives, like
innovation, increase in market share or productivity and growth. In order to fulfill these
aims, it is necessary that the goals of the individuals are not in conflict with the goals of the
organization. Therefore, the overall objective is to achieve goal congruence.
As was the case in traditional organizational theory, it is the objective of management to
ensure that participants cooperate efficiently. However, the idea of authority from above
has been abandoned. While management still strives to influence the behavior of
individuals, this influence is only effective if the individual is willing to accept such
20
Katrin Wittke
International Business Management
influence (Caplan 1966, p. 501). The decision to accept is affected by social, psychological
and economical factors.
In terms of acceptance of the two main models, Caplan (ibid.) suggests that, while the
traditional model has faults, its perseverance as a widely accepted theory suggests that
there are some inherent truths in it and benefits of its practical uses. The two views could
be regarded as opposite sides of a spectrum, with less extreme possibilities which combine
aspects of both theories in the middle.
Naturally, the traditional model and the modern organizational theory are not the only
possible models of organizational behavior. Other alternatives include the Shareholder
Wealth Maximization Model, the Social Welfare Maximization Model and the Problem
Solving Model. For the sake of a concise overview, these will not be discussed in detail.
The crux of the difference between the two theories, as suggested by Colville (1981), is
that one is aimed at explaining the organization while the other concerns itself with the
individuals and their behavior. It is important to point out that these factors should not be
viewed as two separate entities, since they are inextricably linked. Contingency theory, as
developed by Thompson (1967) actually managed to combine the insights on behavior and
decision-making from March and Simon with sociological aspects, which allowed for a
closer look on “control systems, budgeting and planning.
When it comes to the importance of accounting in organizations, Colville (1981) stated it
best when he said that it “is not only a product of organizational reality, it also influences
and helps produce that very reality” (p.129). Management accounting in particular does not
merely serve management as a delivery system of information – it is an integral part of it.
Management accountants as individuals are themselves members of the organization and,
as such, are motivated by similar psychological and social objectives such as security,
prestige, power, and self-actualization. Motivation could also derive from sub-unit loyalty
– i.e., through the departmentalization of the organization, accountants could end up
focusing on the performance of the accounting department while ignoring other important
aspects which would benefit the organization as a whole (Caplan 1966, p. 508)
It is not the aim of this discussion to determine which of these theories represents actual
behavior in organizations more realistically, or in which accounting system could produce
the best results. More importantly, the context in which accounting as a decision support
21
Katrin Wittke
International Business Management
system functions needed to be outlined in order to examine judgment and decision making
processes in detail.
22
Katrin Wittke
International Business Management
3. Selected Aspects of Organizational Behavior
In this section, two fields of study which cannot be left out in a discussion of behavior and
accounting will be discussed. First of all, the judgment and decision-making process will
be outlined and selected cognitive biases will be examined. Secondly, the influences of
control on behavior and motivation are investigated. These two aspects have received the
most attention in the literature on behavior (Hofstedt 1976, p. 42) and are deeply ingrained
in both accounting and auditing research fields.
3.1 Judgment and Decision-Making
JDM processes are integral parts of both accounting and auditing, not to mention everyday
managerial processes. As such, it is important to look at the way that the human mind
performs such processes, in what situations they malfunction, and why it is important to
investigate these problems and try to resolve them.
The first half of the process, the judgment, refers to the cognitive part of a two-part
process. It refers to the formation of an idea or opinion and reflects one’s beliefs (Bonner
1999). This can involve an assessment of risk, predictions for the future or other
phenomena. The decision involves “making up one’s mind” about the evaluated issue and
choosing the appropriate behavior according to one’s preferences.
The decision-making process itself can be grouped into steps. For the purposes of this
section it is sufficient to summarize the steps as they are proposed by Bazerman and Moore
(2013, p. 2). The first step, which is identifying and defining the problem, seems to be
intuitive, but it represents an important means to understanding where the roots of a
disruption lie. An insufficient investigation of the problem can lead to the treatment of
superficial symptoms instead of underlying causes..
The second and third steps are sometimes left out in other descriptions of the process, since
they concern the criteria which are relevant in the decision-making process, for example
different attributes and factors that can influence the result. This means that all factors that
affect the final decision are regarded in detail and are weighed according to their
importance.
The fourth and fifth points according to Bazerman and Moore deal with the generation and
rating of alternatives. This is the one of the main points which have come under criticism
in the past: An objective identification of all possible alternative courses of actions and the
rating of the outcomes of each alternatives is one of the cornerstones of decision-making,
23
Katrin Wittke
International Business Management
but virtually impossible in practice. Individuals neither have the necessary information to
imagine all possible alternatives, nor the cognitive capacities to compute the probabilities
and resulting outcomes under uncertainty. Last but not least, this process, if done
“rationally” would take an inappropriate amount of time.
In order to derive the optimal decisions, the values which were assigned to the alternatives
have to be weighted by multiplying these values with the weight of the criteria. At the end
of this process, the rational decision-maker chooses the alternative with the highest rating.
It seems highly implausible that any person in an organizational setting has the knowledge,
cognitive (or mathematical) abilities or time to follow each of these steps in detail. On top
of that, external conditions such as environmental factors and value structures are
constantly changing, which inhibits an accurate assessment of criteria, probabilities and the
final value. As Tversky and Kahneman (1974) have argued, to cope with these
uncertainties, individuals make use of heuristics and other shortcuts.
Simon (1981)
proposed that instead of maximizing the value of the outcome, humans tend to choose the
alternative which represents the best solution under the present conditions. Reasons for
possible errors which can occur as a consequence of these shortcuts are presented in the
next section as well as possible remedies and debiasing techniques.
3.2 Cognitive Fallibilities in Accounting and Auditing
Some of the more human, integral cognitive effects such as loss aversion have already
been observed and described as early as the 18th century by Adam Smith (1759, reprinted
1977) while other, less obvious cognitive fallibilities and biases have only been formulated
in the last fifty years. These fallibilities result from the fact that, as argued before, humans
have limited cognitive abilities and must rely on “simple probabilistic rules”
(Wilkinson 2008, p.393), or shortcuts, better known as heuristics to cope with a complex
environment. As Tversky and Kahneman (1974) have argued, the use of rules of thumb to
simplify situations can result in “severe and systematic errors” (p. 1124). Three of the
cognitive biases which they developed and which have been heavily researched in reaction
to their work will be presented in this section. The selection was made in order to include
those biases which have been observed to impact both management accounting and
auditing processes.
3.2.1 Availability
One of the biases that were developed by Tversky and Kahneman (1973) in a paper with
the very same name was the availability bias. It is a heuristic which is said to affect an
24
Katrin Wittke
International Business Management
individual’s judgment of the estimated probability of an event by the “ease with which
instances or associations” (p. 208) come to mind. The individual's estimation of this
probability can be distorted by evidence from the environment, for example by recent
examples which are still fresh in memory. The concreteness or vividness of these examples
and can increase the availability effect and, if the examples are not related, lead to errors in
judgment. In everyday behavior, people use heuristics in order to make more or less
accurate predictions about the probability that any given event might occur. As has been
argued when it comes to the safety of driving compared to the likelihood of an airplane
crash or, especially after 9/11, a terrorist attack, events that attract more attention in the
news because of their highly scandalous or sensationalized attributes tend to skew our
probabilistic capabilities. The vividness of the images that come to mind, in part because of
more extended television coverage, can influence or estimation of probabilities and result
in biased judgments.
In accounting, the research on the effect of this bias on judgment and estimation of
probabilities is scarce. It does not seem too unlikely, however, that accounting processes
are influenced by this cognitive heuristic process which whose effects on probability
estimation in our everyday lives has already been proven. One example of availability bias
in accounting could occur when it comes to budget planning. When trying to estimate the
likelihood of an event, such as failure to stay within the budget, the accountant might recall
an unrelated event of great vividness which in turn influences his estimation of the
probability of the actual planning subject, for example the “fiscal cliff” which threatened in
the United States. This hypothetical example is simply a thought experiment to illustrate
how availability biases could affect accounting decisions. Additionally, as Peters (1993)
points out, heuristics and biases can affect the way that accounting information is recalled,
especially by decision makers such as auditors.
When it comes to the examination of availability bias in auditing, the body of research is
far more voluminous, albeit not necessarily definite in its evaluation of its consequences.
One example of how audit planning might be influenced by availability heuristics is the
development of the current auditing plan. During this process, auditors are usually tempted
to base their estimations on last year’s audit results. The bias that comes into play is not
only availability bias but also the (similar) familiarity bias, which refers to the tendency of
individuals to prefer familiar alternatives, which are similar to past decisions, over new
ones (Knapp & Knapp 2012). On the other hand, research on the effects of availability bias
25
Katrin Wittke
International Business Management
suggests that new information factors in highly in the estimation of events. Therefore, one
could argue that last year’s audit results might not favor in too markedly and the two biases
cancel each other out. Nonetheless, it is important to point out that some anchoring and
adjustment is taking place during this process. The effects of this bias will be discussed in
the following section.
One of the more notable studies to examine auditor’s susceptibility to availability bias was
conducted by Libby (1985) and looked at the development of error hypotheses which he
assumed to be “influenced by their expected frequency of occurrence” (p. 650). The results
of the experiments confirm Libby’s hypothesis and he proposes that there is a positive
connection between the availability of errors in memory and the estimated frequency by
which these occur (p. 657). The responses in the subsequent literature to these findings
were manifold. Some researchers such as Shanteau (1989) have argued that it might not
have been availability bias which was proven in these experiments, but actually
accessibility. Others posited and were able to prove that the influence of availability bias
significantly decreased for more experienced or specialized auditors who were able to
judge the probability of errors with more accuracy than inexperienced auditors (Libby and
Frederick 1990). A similar immunity of experienced auditors for irrelevant, yet highly
available information such as audit results from the previous year was also found by
Bedard and Wright (1994)
One more example can be found by Knapp and Knapp (2012): They argue that since client
fraud is a “rare event” (p. 41), a vivid event might not easily come to mind and hence
might be underestimated. In order to explain the failure of an auditing team to detect
fraudulent behavior by retailer Crazie Eddie Inc., the authors argue that the auditors simply
underestimated the likelihood of such an event because of the scarcity of readily available
examples. The presumption made by Knapp and Knapp in this example is not supported by
empirical studies and it is debatable whether it is a very realistic example, especially when
one considers the relative recentness of scandals such as Enron, Bernie Madoff and the
general chaos in the aftermath of the financial crisis.
3.2.2 Adjustment and Anchoring
Adjustment and Anchoring refers to the heuristic used by people when they make
estimates by starting from an initial value - the anchor - and then adjusting the values to
yield the final answer (Tversky & Kahneman 1974). It is therefore a two-step process
26
Katrin Wittke
International Business Management
where the anchor can either be selected by the individual or given by an external source. In
the original experiment by Tversky and Kahneman, subjects were asked to estimate the
percentage of African member countries in the UN. At the same time, a random number
was generated on a spinning wheel. Between the estimated numbers of the control group
and of those who generated random number, the unrelated number had a clear effect on the
estimations which were made. These effects persisted even though the subjects were
reminded that it was a randomly generated number and they adjusted from the anchored
number. These results have been replicated in further experiments, for example when
subjects were asked to estimate the population of Chicaco, or the willingness to pay for
certain items (Wilkinson 2008, p. 395). The argument that has been put forward in the
subsequent research was that the adjustment that was made to the initial value was
insufficient and left the result too close to the anchor, therefore leading to a bias. Epley and
Gilovich (2006) argued that these insufficient adjustments are the result of a practice which
resembles the idea of satisficing, originally presented by Simon (1964) in the context of
bounded rationality. They argue that the adjustment process is only continued until the
value reaches “a range of plausible values” (p. 312), which implies a kind of cost-saving
method of cognitive capacities.
A practical utilization of anchoring and adjustment in managerial as accounting proposed
by Ahmed Riahi-Belkaoui (2002) refers to the development of cost forecast based on an
anchor of last year’s results (p. 215), which is then adjusted to account for differences in
conditions, such as raw material prices or inflation. Unlike the previously studied
examples, this process, arguably a widely used practice in accounting and budgeting,
would represent a conscious process made by the accountant.
When it comes to auditing tasks, there have been several areas where the use of anchoring
heuristics has been posited and studied in corresponding experiments. The results from
these studies vary significantly. One domain wherein possible effects of availability bias
have been studied is the process of developing the extent of substantive tests for the
auditing period. Researchers proposed that the range of tests and sample sizes from a
previous period or engagement are used as an anchor, which will then be adjusted to
changes in the environment of the firm, for instance of internal control mechanisms. This
would mean that for a firm which has increased its control mechanisms, the magnitude of
tests would be smaller. While this may seem like a useful process, the process can be
27
Katrin Wittke
International Business Management
erroneous if the adjustments are not moving “far enough from the anchor” (Joyce & Biddle
1981, p.122).
This hypothesis was tested by Joyce and Biddle and the results of their experiments were
largely inconclusive. While experiments which were marked by low auditor familiarity
confirmed their assumption, a clear impact of anchoring bias was not found in other
evinronments. They vaguely summarize: “sometimes anchoring happens, and sometimes it
does not” (ibid., p.143).
One important point of discussion among researchers of heuristics in auditing is the
influence of experience as a mitigating factor. Experimental results by Shields et al. (1988)
revealed that more experienced auditors are able to concentrate their utilization of this
heuristic to those circumstances when it is efficient to make use of them and hence reduce
the impact of biases. It has been argued, though, that the results of the research on this
specific subject are not conclusive enough.
Wüstemann and Koch (2007) make the point that the reason why the influence of
experience on the effect of heuristics is hard to measure lies in the design of experiments.
In order to accurately measure the impact of biases, there would have to be a control group
which performs the same tasks as the uncontrolled group, consisting of experienced
auditors. In order to be reliable, the control group would have to be inexperienced – but at
the same time they need to have enough experience to understand and perform the tasks, a
difficult research setting to attain (p. 23).
When it comes to the task of mitigating anchoring effects, before discussing possible
debiasing techniques, it has to be reviewed whether or not it is necessary to attempt to do
so. Since the research on the extend of the heuristic effects are inconclusive, and practical
work experience seems to have positive influences on their magnitude, it could be argued
that a restructuring of judgment processes in auditing might do more harm, in the form of
costs, than good. On top of that, the conservative behavior of auditors which is driven by
motivation and incentives has been observed as a natural debiasing technique by Cohen &
Kida (1989). For example, auditors might be reluctant to reduce the extent of tests of detail
in cases where analytical review did not indicate any problems. On the other hand, when
the conservative behavior of auditors is paired with adjustment to anchors, it might be
important to consider some debiasing strategies.
28
Katrin Wittke
International Business Management
Most of the mitigating techniques proposed in the literature which are supposed to lessen
the effects of heuristics involve conscious deliberation of the information available. As
evidenced by Epley and Gilovich (2005), the mere “forewarning of bias” (p. 209)
improved the adjustment process of participants when dealing with internally provided
anchors. Since anchors can also be provided from external sources, the authors argued that
the outside stimuli should be either avoided or given conscious consideration to determine
in what way they could be wrong.
To sum up, it can be argued that the most effective and cost-efficient technique might be to
encourage auditors to give information conscious and critical deliberation.
3.2.3 Confirmation bias
Confirmation bias, which is also known in the literature as positive test strategy, refers to
the tendency of people to selectively search for and prefer information which confirms
their own beliefs and expectations (Knapp & Knapp 2012) and, in turn, to favor evidence
less which does not support their hypothesis.
Our brain usually has “reasons” why it employs certain shortcuts. One of the reasons why
we selectively retrieve information which supports instead of contradicts our initial beliefs
is that this way, we are more likely to gather useful information. Also, due to our limited
cognitive abilities to process information, confirmation bias can act as a useful shortcut
which requires fewer cognitive capabilities. Instead of analyzing every single piece of
information or evidence, individuals tend to concentrate on certain facts which are useful
to them. In everyday behavior confirmation bias can present itself in the form of
unconsciously preferring to watch political shows which support their beliefs, or to put less
weight on information which contradicts them.
Another reason why people might favor information that supports their own point of view
is to reduce cognitive dissonance. Armet (2013) argues that people do not like to be at odds
with themselves, i.e. their actions and their values should, optimally, reflect one another.
Incongruence between one’s values and evidence might lead to feelings of cognitive
dissonance. The focus on evidence that supports our values is a mechanism to reduce such
negative feelings. An important characteristic of confirmation bias as it is understood by
psychologists as well as in this context is the fact that it is done unconsciously; i.e. subjects
do not intend to prefer information which favors their own point of view, and they may not
29
Katrin Wittke
International Business Management
even be aware of the effects of the bias. Numerous studies have been conducted in areas
such as gambling, astrology, descriptions and judgments of personality traits and
reinterpretation of observed behavior to confirm a hypothesis 4, all of which have shown
that there exists an asymmetry in the weighting of confirming and disconfirming
information in favor of a preset belief. Confirmation bias can also present itself in
disproportional criticism of evidence that is more likely to refute our hypothesis.
When it comes to the effects of confirmation bias in accounting settings, the research has
focused largely on tax professionals, with a significant amount of evidence in studies
pointing at the existence of confirmation bias5. One of the reasons why accountants might
have a predetermined opinion which would lead to the favoring of information that
supports that belief is the client relationship. During the evidence collecting phase, which
lower level accountants are responsible for, confirmation bias can occur in the shape of
accountants relying more heavily on information which coincided with their initial opinion
of the client. In a study by Hatfield (2001) the supervising function of higher-level
accountants has been shown to mitigate this bias during the review process. This is in
accordance with previous findings that work experience has a mitigating effect on biases,
the same way that practical experience has been shown to reduce the effect of availability
bias in the previous section.
In auditing, this bias can come into play in such a way that auditors may selectively search
for evidence that supports initial assessments and hypotheses about the “fairness of a
client’s financial statements” (McMillan & White 1993, p. 445) rather than for information
which rejects those.
Another similarity between confirmation bias and availability bias is the ambiguity of the
research results when it comes to the magnitude of the effects in auditing.
During the assessment of the influence of confirmation bias on the behavior of auditors, it
is important to evaluate the reciprocating or even counteracting effects of professional
skepticism, also known as conservative bias. In the International Standard on Auditing
(2009, p. 78), professional skepticism is defined as
4
Numerous examples can be found, cf. for example studies by Snyder & Uranowitz (1978), Darley and
Gross (1983), Duncan (1976).
5
Cf. Hatfield (2001), Johnson (1993), Cloyd and Spilker (1999)
30
Katrin Wittke
International Business Management
“An attitude that includes a questioning mind, being alert to conditions which
may indicate possible misstatement due to error or fraud, and a critical
assessment of audit evidence.”
This initial mindset which focuses on error-related evidence can have various effects on
confirmation bias: If the hypothesis of the auditor is that the client’s financial information
is correct, professional skepticism could lessen confirmation bias, since without skepticism
the individual would be prone to put more weight on information which supports their
initial belief. On the other hand, if conservative bias is engrained in an individual’s
mindset to a point where their conscious and unconscious beliefs are that the financial
information is wrong, confirmation bias and professional skepticism could reinforce one
another. That is, the instead of balancing each other out, the auditor would shift his focus
largely on information that would prove financial statements to be faulty. While this is
inarguably the point of auditing, a disproportionate weighting of error-related information
can lead to unnecessary and ineffective audit procedures (McMillan 1993).
As has been implied above, in an effort to ascertain whether auditors focus on confirming
rather than disconfirming evidence, research findings have been contradictory. McMillan
and White (1993) conducted a study whose findings suggest that the susceptibility to and
magnitude of confirmation bias depends on the potential source for discrepancies. They
found that depending on whether an individual believes that fluctuations in financial
information result from erroneous financial reporting or from changes in the economic and
financial environment, the auditors were more or less likely to be influenced by
confirmation bias, respectively. Those that believed in erroneous financial statements were
more prone to be influenced by confirming and disconfirming evidence.
Although some of the discrepancies among research findings can be traced back to
differences in research methods, a similar inconclusiveness can be observed when it comes
to the attempt to identify the relationship between work experience and confirmation bias.
Scientific research6 as well as psychological studies have found that confirmation bias
prevails over several levels of expertise, while there have also been contradicting studies
which suggest that experience mitigates the effects of confirmation bias7. While it seems
intuitive that work experience and expertise help with the mitigation of biases, a
6
7
Cf. Bamber et al. (1997), Jones and Sugden (2001)
Cf. Kaplan and Reckers (1989)
31
Katrin Wittke
International Business Management
conclusion has not yet been reached. Therefore it is necessary to take debiasing techniques
into consideration.
One such proposed method is the encouraging of auditors to identify multiple possible
reasons for fluctuations and sources of problems. This evaluation of alternatives promotes
critical thinking and can lead to a more balanced analysis of evidence. Another suggestion
which aims at engaging auditors in further reflection upon the given information and their
corresponding decisions is the implementation of extended required documentations
(Emby & Finley 1997). It can be argued, however, that his is a way to make the auditing
process less efficient. Results of the study by Hatfield (2001) suggest that the review
process already mitigates some of the effects of confirmation bias, since it combines both
aspects that were mentioned above: The review is performed by a more experienced
auditor and it imposes upon the lower-level auditors the knowledge that their results will
be subject of scrutiny, which can encourage critical, yet balanced thinking.
3.3 Control, Incentives and Their Effects on Behavior
Modern organizations have become large, multifaceted, multinational, departmentalized
and hierarchical conglomerates. Is indispensable that there be a mechanism to make sure
that the operations run smoothly and individuals are held accountable for their actions
(Riahi-Belkaoui 2002, p. 47). Control systems therefore fulfill an essential function of the
management activity. The different kinds of control and their effects on performance are
therefore examined in this section.
According to Caplan (1971), the accounting system serves as “a control device which
permits management to identify and correct undesirable performance” (p. 13). Accounting
information itself provides the basis for the control of costs and people (Jones 1976, p.17),
and can motivate and influence the behavior of individuals working in the organization,
from factory workers to managers. It is a means to achieve guide motivation of individuals
towards the direction of the goals of the organization to achieve goal congruence. It is used
to keep track of the performance of individual departments and to verify whether the goals
of the organization are being met.
Riahi- Belkaoui (2002) provides an overview over different classifications of control and
their uses. For behavioral accounting, a few selected means of control are important. One
32
Katrin Wittke
International Business Management
of the most important types of control is the setting of standards of performance. Such
standards can aim for example at an increase in efficiency or a lowering of costs. In order
the performance of the firm and the degree of conformance among the individuals, the
actual performance needs to be measured and compared to the previously set standard.
Differences can lead to errors or sources of control. This represents the traditional model of
control through predetermined budgets or standard costs.
Additional classifications of control include the standardization of quality for external
suppliers, and, of course, the motivation of individuals within a firm.
The exertion of control of one human being over another does not occur if there is no basis
for control. One of the most logical bases for control lies in the fact that organization
compensates individuals for specific tasks. The basis of control in this case lies within the
ability of the firm to give out rewards for performance, be they monetary, through
promotions or by increasing benefits or responsibilities of individuals. On the flipside of
that coin, the organization can also punish individuals for behavior which does not
coincide with the goals of the organization or directly conflict the standards of
performance. Punishments can include demotions, stripping of benefits or simply a bad
reputation. The basis of power depends of the individual situation Riahi-Belkaoui (2002).
The aim of accounting system and information is to motivate individuals to act in a way
that is beneficial for the information and helps achieve the goals of the organization (04,
18). But, as has been argued before, the organization is made up of a number of people
whose individual goals might not be aligned with the goals of the organization. This goal
incongruence might stem from personal economic goals, intergroup conflict or the will to
increase the performance of a specific department at the expense of the benefit of the
organization as a whole. The desired consistency between personal goals and those of the
organization might be unattained.
In order to motivate people in such a way as to influence their behavior so that it might
benefit the firm as a whole, individual needs have to be taken into consideration and “be
met by appropriate economic rewards” (Jones 1976, p. 19). According to the modern
organizational theory, these needs go beyond simple economic incentives to include fair
treatment, recognition, self-actualization and other less tangible aspects of human needs.
An important aspect of organizational control is the reaction of the individuals towards the
control mechanisms: Argyris’s widely cited research on “Human Problems with Budgets”
33
Katrin Wittke
International Business Management
(1953) has found that budgets can be viewed as negative when they are perceived to be
used by management to manipulate or control them. If an individual feels like he is being
intentionally steered towards the goals of the organization, control can be viewed as an
unnecessary exercise of power over others and yield strong, negative emotional responses
to control.
One of the most commonly proposed solutions for the development of common goals and
the directing of individuals towards wanting to achieve them is participative budgeting.
The cooperation between a manager and his superior on goals and budgets for the next
periods has been shown to have many beneficial effects: First of all, the communication
between the two hierarchically different individuals improves. Secondly, if the manager is
allowed to make active contributions towards the setting of goals and budgets, he is more
likely to identify himself with the goals. It is important to point out that failure to include
managers in communication and active participation can have just the opposite effect.
Lastly, if done right, the managers internalize the collaboratively set goals and are hence
more likely to work towards achievement of these goals.
Another aspect of control which can influence the compliance of individuals with firm
policy has been observed Birnberg and Nath (1967). They argue that assert that internal
auditing can alter worker behavior in a positive way. The research on the relationship
between internal or external auditing and manager and accountant behavior has been
sporadic at best. Future research in this field would offer a deeper insight into why and
how individuals prepare for the audit and whether they continue their “good” behavior
over a prolonged period of time – or simply until the audit is over.
34
Katrin Wittke
International Business Management
4. From The Auditor’s Perspective
As was already indicated in the introduction of this thesis, it is impossible to regard aspects
of internal accounting completely separately from auditing. The objective appraisal of the
financial statements has become a normal part of business for many medium and large
firms, specifically public companies and those who wish to obtain external financial
investments or satisfy a stakeholder’s wishes. Therefore, in the influences of independence
and objectivity on performance are examined and proposed measures to offset these
adverse effects and alternatives are explores.
4.1 Auditor Independence – Where Do Loyalties Lie?
Auditing is a judgment decision-making process with many factors, both behavioral and
technical, which can influence the final results among the way. Attempts to define which
characteristics of an audit environment have the strongest effects on audit quality have
been manifold. One such example is an empirical study by Carcello, Hermanson and
McGrath (1992), which has confirmed the assumption that attributes of the audit team are
perceived as more important than those of the audited firm. Especially aspects of
experience, both industry-specific and client-related of the audit team and of the firm itself
as well as the auditor’s responsiveness to the needs of the client have been found to exert
the highest influence on audit quality.
In subsequent research, the relationship between auditor tenure in a specific firm and
independence has been examined in detail. Reasons for the seemingly ceaseless interest in
this field partly result from the fact that assumptions of a correlation between tenure are
both intuitive and controversial: More often than not does an organization stay with the
same auditing company for several years. This means that auditors, be they managers or
partners, tend to come back year after year and spend a significant amount of time with the
preparers of financial information and members of the management. While the benefits
which result from auditors being familiar with the firm, its members and internal processes
are plentiful, the closeness between auditor and client that is built up over time can
adversely affect auditor independence and, in turn, audit quality. This conflict can be
illustrated by regarding the hierarchical layers in auditing: The auditor receives his wage
from the audit firm. The audit firm is in turn paid by the audited organization, which
contracted the audit firm due to regulations or interest of external share- and/or
35
Katrin Wittke
International Business Management
stakeholders. Going back to the auditor, although he spent a significant amount of time
working for the auditing firm, he also resides in close contact with the client for what can
shape up to be a large amount of time, depending on the size of the organization. Auditors
might therefore try to avoid discord and relax stern measures such as large sample sizes or
in depth-analysis of certain processes to the client’s benefits.
Knechel and Vanstraelen (2007) propose further possible reasons for loss of independence,
for example the desire of auditors to avoid conflict with the client in order to keep him as
such. The pressure on auditors to keep lucrative long-term relationships with clients is
enormous (Kroll 2012), since the costs of acquiring new clients includes marketing and
initial fees, not to mention the process of familiarization with the new client which can take
up to two years (Daugherty et al. 2012, p. 99), can be significant. Hence, auditors might
rather unwittingly turn a blind eye and indulge client request for leniency (Daugherty et al.
2013, p. 29)
But one study which concerned itself with the relationship between client and auditor,
specifically with service ethic instilled upon members of audit firms stands out: AndersonGough et al. (2000) conducted a detailed study in order to determine the ways how “client
discourse” impacts the training of new members of the organization and found that “the
client” has become an abstract symbol which is used to justify long work hours, tight
budgets and other requirements of behavior.
In the past, research on the relationship between auditor tenure and audit quality, which
can be measured by the likelihood of the auditors to issue correct going concern opinion
when the company subsequently goes bankrupt, has yielded contradicting results8. The
issues of competence and industry-specific expertise are also possible reasons for
variations in audit quality, but are not subject of the debate on hand. Instead, possible
measures of increasing audit objectivity, performance and independence will be examined
after having introduced another important aspect of everyday auditing behavior that can
influence audit quality.
8
Cf. James N. Myers, Linda A. Myers, and Thomas C. Omer (“Exploring the Term of the Auditor-Client
Relationship,”Accounting Review, vol. 78, no. 3, 2003,pp. 779–799), and Van E. Johnson, Inder K.
and Khurana, and J. Kenneth Reynolds (“Audit-Firm Tenure and the Quality of Financial Reports,”
Contemporary Accounting Research,vol. 19, no. 4, 2002, pp. 637–660)
36
Katrin Wittke
International Business Management
4.2 Measures to Ensure Audit Quality
Having examined the most widespread effects on audit quality, an answer needs to be
found on how to enhance the objectivity of auditors, their independence and reinforce their
inherent skepticism to capitalize on its effectiveness.
One of the possible measures to prevent the negative effects of long tenure is the
introduction of mandatory auditor rotation. A topic which has been under discussion since
the 1970s, it has been proposed again by the “Regulation of the European Parliament and
of the Council on Specific Requirements Regarding Statutory Audit of Public-Interest
Entities” in 2011, and by the Public Company Accounting Oversight Board (PCAOB) in
August of 2012. Both institutions proposed to introduce specific term limits after which
firms would be obliged to change audit firms. The proposed term lengths vary from
periods of six to seven years.
Proponents of such measures stress the importance to “protect” auditor independence,
objectivity and skepticism towards clients which can be overshadowed by the pressure to
keep long client relationships. Some of the more famous failures of auditors to discover
fraud or to issue going concern opinions9 have been blamed on decreased auditor
skepticism due to long, close auditor-client-relationships (Daugherty 2013, p. 29). It could
be claimed that a mandatory rotation of audit firms lowers the probability of the
development of close relationships with clients. Additionally, the prospect of another firm
reviewing the work in the next fiscal year after the rotation has taken place can act as
powerful incentive to identify and report problems. While it is incontestable that a “new set
of eyes” can offer a new point of view on a given situation, the disadvantages of auditor
rotation are numerous and should not be disregarded lightly.
Many have argued that positive effects of audit firm rotation on audit quality are not
clearly discernible from empirical evidence. On the contrary, longitudinal studies in
countries which have introduced mandatory audit rotation such as Korea and Italy have
shown that quality actually increases with tenure (Kroll 2012, p.45). The observed drop in
audit quality in the beginning of a new rotation can actually have the adverse effect of
increasing audit failures instead of reducing them.
9
The most prominent examples are the failures of American International Group Inc. and Lehman Brothers
Holdings Inc.
37
Katrin Wittke
International Business Management
Another important aspect is that of client- and industry-specific knowledge which is
accumulated over time. If auditors are forced to leave a firm after a specific time period,
the building of institutional expertise becomes more difficult, and in the worst-case
scenario, cannot be applied to other firms in similar industries.
Lastly, the cost of mandatory audit rotation is one of the most frequently cited negative
consequences of the introduction of mandatory rotation. With a new client comes the
process of gathering knowledge about the client and familiarizing with the organizational
individualities, which costs a lot of time and hence would drive up audit fees. The
increased costs would be passed along to the client, while other market forces remain
stagnant and put increased competitive pressures on audit firms (Daugherty 2013, p. 33).
The plethora of resistance against the proposed regulation, supported by research findings
that should not be ignored, poses the question whether there are more (cost-) effective
alternatives to the problem of auditor-client relationships. In fact, one alternative to the
stringent mandatory rotation of auditor firms has been in effect since 2002: the SarbanesOxley Act of 2002 included a provision which requires audit engagement partners to
change clients after a maximum period of five years. This rotation of individual auditors
instead of the entire firm has several advantages: First of all, more junior member of the
engagement team are allowed to stay with the firm. Secondly, even if the engagement
partner is required to rotate, inner-company knowledge exchange among the auditors can
help retain at least some of client-and industry-specific knowledge through documentation,
interaction, planning and strategy.
Daugherty et al. (2013) points out that a significant amount of the research has stressed the
beneficial aspects of tenure and expertise in comparison with adverse effects of auditor
(in)dependence. They suggest increased focus and investment on training of auditors – a
remedy which has been proposed with respect to debiasing techniques as well. So, in the
words of senior vice president of Pfizer, Loretta Cangialosi as cited by Kroll (2012),
instead of “using an elephant gun to kill an ant”, it might be more beneficial for everyone
involved to focus on the most important assets in any organization – the people.
38
Katrin Wittke
International Business Management
5. Survey – Behavioral and Environmental Influences on Auditing
Processes
5.1 Research Objectives
This study has been designed in a way as to determine whether those aspects of behavior
which have been found in the theoretical framework of behavioral research actually are
observable in auditing processes. In the core of the analysis lies the question of the effect
of the working environment and conditions on the auditing team’s behavior and the quality
of the audit report. Particular areas of interest were auditor behavior under different
sources of pressure, the relationship between firm and team size and working atmosphere
as well as perceived pressures, and the differences between planned and actual auditing
processes. An additional factor which will be interesting to observe is whether there are
observable differences between Big Four10 audit firms and smaller organizations,
especially when it comes to participation in audit planning and perceived pressure from
superiors or the client.
Since actual auditing processes are notoriously difficult to reproduce in practice and would
have gone beyond the scope of this thesis, a survey was conducted to gather answers from
those who worked in the field. In the next section, the design of this survey will be
outlined.
5.2 Research Design and Method
The chosen method of data collection was the conduction of an online survey, since it was
hoped that through social networking sites a vast population could be reached. Because of
the specific nature of the research topic, the survey was directly targeted at students of
business management, finance and accounting who gained firsthand experience in audit
firms as interns or student workers. It was also directed at former students who are or were
working in an audit firm or department. The reason for targeting former interns and student
workers in particular was that it was expected for them to be more inclined to answer
honestly about business practices which might not shed a flattering light on their (former)
team or the organization as a whole, such as changing sample sizes or pressures from the
team or superiors. In contrast, auditors who were in management positions are expected to
10
Big Four is the name commonly used to group the four biggest professional service firms together. These
include Deloitte & Touche Tohmatsu, Price Waterhouse Coopers, Ernst & Young and KPMG.
39
Katrin Wittke
International Business Management
be more prone to either justify frequent changing of audit plans and sample sizes or
underestimate such practices. Naturally, the possibility existed that interns and student
workers would not have enough work experience in year-end audit to fully recognize the
magnitude of these decisions. However, it is commonly known that interns and student
workers are “thrown into the deep end” almost immediately and gather work experience
very quickly especially in Big Four audit firms. As can be seen in Figure 2 (p. 44), the
majority of respondents who worked for less than six months were employed by one of the
Big Four audit firms, which suggests that they felt confident enough about their work
experience to participate in this study.
The importance of work experience in year-end auditing was also made clear in the
description of the survey, which was posted in five student networking groups on
Facebook as well as in the official HWR Berlin School of Economics and Law group on
Xing. Additionally, the survey was directly forwarded to students and alumni who have
worked or are still working in audit firms. They were also asked to forward the survey to
(former) colleagues, yet the limited number of responses suggests that this was rarely the
case.
Layout:
In order to reach the largest population possible, the questionnaire was available in either
English or German. The English version can be found in its entirety in the Appendix B.
The survey consisted of fourteen questions and was organized in four parts:
Part 1:
Part 2:
Part 3:
Part 4:
Part 5:
Introduction
General Information
Work Experience
Auditing Process
General Satisfaction
The questions were mainly posed in the form of multiple choice questions which
sometimes included the ability to answer openly in case the possible answers were not
deemed sufficient by the participants. The reason for primarily choosing closed questions
over open questions lies in the fact that closed questions are designed not necessarily to
promote certain answers, but rather stimulate and encourage the participants to regard the
subjects from a different angle.
Those questions which formed the third and fourth part of the questionnaire are of
particular interest for this thesis. Among them were specific questions about the auditing
process that concentrated on methods and parameters (such as estimated risk or sample
40
Katrin Wittke
International Business Management
sizes) which the management team defines during the planning process. The aim was to
ascertain whether these parameters were changed on a regular basis as the auditing process
progressed, particularly in regard to approaching deadlines or tight budgets. Respondents
were asked to evaluate particular aspects of the working environment such as team size and
working atmosphere, as well as to estimate whether they observed divergences between
planned and actual processes. If so, participants could estimate to what degree the audit
quality was affected, and whether or not they deemed the involvement of the auditing team
in planning processes sufficient and satisfactory.
The survey was posted at the end of June and “pushed”, i.e. commented upon by the
author or fellow students in order to keep it at the top of the groups on social networking
websites. In spite of that, the number of usable responses was 35, which was much lower
than was hoped for and expected. The survey link was opened 150 times in eight weeks,
which amounts to a response rate of 23.3 %. It can be argued that the low response rate
was partly due to the timing of the survey posting: In June and July, many students were
either busy studying for exams or writing their own theses, and auditors were most likely
on vacation, which was gathered from the automatic e-mails which were sent as a
response. Even if some of the auditors who were still working in the field came back from
vacation in time to fill out the survey, it is unlikely that this represented a top priority for
them. Nevertheless, there were 23 answers in total from people who were still working in
the industry and took time out of their schedule to fill out the survey. Consequently, they
made up more than two thirds of the total population, as can be seen in Table 1 below.
Table 1: Active employment in the industry
Question 4: Are you still working in the auditing sector?
Yes
23
65,7
Valid
Percent
69,7
No
10
28,6
30,3
Total
System
33
2
94,3
5,7
100,0
35
100,0
Frequency Percent
Valid
Missing
Total
Cumulative
Percent
69,7
100,0
41
Katrin Wittke
International Business Management
5.3 Findings & Analysis
Age and Work experience
As was expected, a majority of the respondents, namely 26 out of 35 (or 76,5 %), have
worked in one of the Big Four audit firms. The total population of respondents is broken
down by age (see Appendix C for detailed table) which shows the surprising amount of
responses from more tenured auditors: While half of the respondents were age 25 or
younger, 8.6 % of respondents were more than forty years old, leading to a median age of
respondents of 28.26 years. Similarly, 11.4 % of respondents had a staggering work
experience of more than ten years (see Figure 1 below). Still, one third of respondents have
only worked in the auditing industry for less than six months and another third between
one and five years. As can be seen, the distribution of people who were working as either
interns or working students and those who held positions as full-time employees
(professionals) or higher is fairly even, with 54.3 % and 45.7 % respectively (see Appendix
D for details). All in all, the responses make up a relatively even sample, which can give
some interesting insights into the differences between more tenured auditors and the
perceptions of interns and young professionals.
Figure 1: Work Experience by Firm Size
*Percentages are based on total number of respondents.
42
Katrin Wittke
International Business Management
In order to estimate the actual work experience gathered by the respondents during their
employment, they were asked to state the firm size of the companies whose year-end audits
they participated in. While a total of 8 respondents answered that they participated only in
one year audit for a small, medium or large firm – who were evenly represented – the
majority of respondents, namely 71,4 %, participated in more than one year end-audit.
Most of the participants who belonged to the latter category have worked for one of the
Big Four companies (For more details, please see Appendix E). This supports our
aforementioned hypothesis that even interns and working students, who made up half of
the respondents, quickly participate in practical work.
Teamwork and Atmosphere
The participants were also asked to describe some key aspects of their working
environment. First of all, they stated the team size in terms of team members in audit
teams. As can be seen below in Table 2, the majority of respondents worked in smaller
teams of two to three or four to five people. Larger audit teams of six to nine people were
much rarer, with only 17 % of respondents stating that they worked in teams of that size,
and merely 8,6 % declaring of having worked in teams of ten people or more. However,
only the respondents from Big Four audit firms answered having worked in such large
teams, which was to be expected11.
Table 2: Distribution of team size
Valid
Missing
Total
2-3 people
4-5 people
6-9 people
10 people or more
Total
System
Frequency
10
10
6
3
29
6
35
Percent
28,6
28,6
17,1
8,6
82,9
17,1
100,0
Valid Percent
34,5
34,5
20,7
10,3
100,0
When asked about the atmosphere in their teams, participants were given a multitude of
adjectives to choose from. They had the possibility to choose more than one answer, and
could also answer openly. The results are displayed in Appendix G and will be
summarized henceforth. While the possible answers were randomized in the survey itself,
they have been arranged so that the positive attributes, such as “friendly” and “informal”
are clearly visible in contrast to more negative aspects, such as time pressure, fearfulness
11
For a detailed crosstabulation between firm size and team size, see Appendix F.
43
Katrin Wittke
International Business Management
towards the client or the boss. The aspect of competition was grouped with the negative
attributes, but it can be argued that a competitive atmosphere can have positive effects on
performance.
With a response rate of 11,2 % and 20,2 % of all responses, the attributes “stressful” and
“under time-pressure” respectively were the most commonly cited negative aspects of the
atmosphere. Especially the aspect of time-pressure is pervasive here, since, with a total
response quantity of 18, it has been cited by half of the participants. Only one other
attribute has been selected more often, namely the aspect of “friendliness”, which can be
viewed as a nice balance against the negative aspect. Having been chosen by 19 of the 35
respondents, it is with 21,3 % of all responses the most frequently selected answer for this
question. A general conclusion from this can be drawn: Even though the teams are under a
lot of time pressure, the atmosphere is still friendly – and not marked by competition, as
the low response rate of 2,2 % underlines. The aspect of time-pressure seems to impact
people differently, as can be gathered from the contrasting answers “relaxed” and
“stressful”, who have been chosen at almost the same frequency, namely nine and ten
times, respectively.
Figure 2: Firm size and positive characteristics of atmosphere
Percentages are based on the total number of responses.
44
Katrin Wittke
International Business Management
Figure 3: Firm size and negative characteristics of atmosphere
Percentages are based on the total number of responses.
Involvement in Planning Processes
Before investigating possible changes in preciseness of auditing tasks in the face of
approaching deadlines and the frequency of sample size adaptation, the aspect of
involvement in planning processes in Big Four firms and smaller firms is examined.
Tables 3 and 4 show two cross tabulations of the firm sizes with the perceived degree of
involvement of the respondents in the planning process and the desire for change,
respectively.
What is remarkable is the nearly identical distribution of perceived involvement between
the respondents of the two firm sizes. There is only a slight difference on the extreme ends
of the spectrum: The percentage of respondents who worked in a Big Four audit firm and
perceived to be involved to a low degree in the planning process is slightly higher than that
of the participants who worked in the smaller firms. The opposite is true for respondents
who felt very involved in the planning processes.
45
Katrin Wittke
International Business Management
Table 3: Cross tabulation between firm size and perceived degree of involvement in planning
process
Perceived Degree of Involvement
Total
Low
Medium
High
involvement involvement involvement
Was the firm Yes
one of the Big
Four
companies?
No
Total
Count
%
of
Firm
Size
Count
%
of
Firm
Size
Count
%
of
Firm
Size
4
11
7
22
18,2%
50,0%
31,8%
100,0%
1
3
2
6
16,7%
50,0%
33,3%
100,0%
5
14
9
28
17,9%
50,0%
32,1%
100,0%
When it comes to the desire to change the degree of involvement, those who worked in
larger firms (and are hence slightly more likely to have uninvolved in the planning process)
expressed the desire to be more involved in planning. While it is to be expected that those
who feel uninvolved would like to change the degree of involvement in the future, the
scale of the differences between large and small firms does not correspond to the marginal
discrepancies in perceived degree of involvement, but is disproportionately higher. The
differences which are referred to are highlighted in Table 4 on the next page. More than
half of the respondents who worked in large audit firm would prefer to be more involved in
the planning of audits and projects. In comparison, only 16 % of the smaller firm audit
participants desired any change at all, be it towards higher degree of involvement or less
participation in planning processes. A two-third majority was satisfied with their degree of
involvement.
46
Katrin Wittke
International Business Management
Table 4: Cross tabulation between firm size and perceived degree of involvement in planning
process
Desire for change
More
Less
No change
involved
involved
necessary
Was the firm
one of the Big
Four
companies?
Total
Yes
Count
No
%
of
Firm
Size
Count
%
of
Firm
Size
Count
%
of
Firm Size
11
1
9
Total
21
52,4%
4,8%
42,9%
100,0%
1
1
4
6
16,7%
16,7%
66,7%
100,0%
12
2
13
27
44,4%
7,4%
48,1%
100,0%
These differences in desire to change the status quo can stem from the organizational
structure of audit firms and the amount of audit engagements that are held by the
individual partners. It is, for example, much more probable that the person responsible for
the planning of the audit, most likely the managers, is available for direct contact with the
interns, student workers and young professionals. In Big Four companies however, where
interns and students sometimes have to be borrowed from other departments during the
busy season, contact with and knowledge of the responsible individuals can be more
indirect. The perceived degree of involvement in planning of the individual’s own
participation in the audit, for example at what date and time they will be working for which
client, might be similar in both kinds of organizations, because a functioning scheduling
process is vital. A possible reason for the wish for more participation in planning can lie in
the desire to gain more experience in planning processes or in differences in the ways how
possible scheduling conflicts are resolved. Again, the aspect of availability of the person in
charge might play a role here: If the manager is located on the same floor or even in the
same office as the individual, the planning process can run much more organically.
Additionally, audit partners in larger firms are more likely to oversee several audit
engagements at once and are hence less flexible when it comes to reacting to scheduling
conflicts.
47
Katrin Wittke
International Business Management
This section of the questionnaire was dedicated to aspects of audit quality and the
preciseness with which it is executed. First of all, a general look at the results for Question
No. 11 which deals with preciseness of tasks towards the deadline: Table 5 shows the
frequencies of answers for each category.
Table 5: Frequencies for question 11: preciseness of audit tasks
Frequency
Valid
Cumulative
Percent
6
17,1
23,1
23,1
Small
decrease
preciseness
6
17,1
23,1
46,2
2
5,7
7,7
53,8
12
34,3
46,2
100,0
26
74,3
100,0
No
change
preciseness
Total
Total
Valid Percent
Significant decrease in
preciseness
in
Team-decision to lessen
preciseness
Missing
Percent
System
in
9
25,7
35
100,0
With nine answers missing, the remaining 26 responses are fairly evenly distributed:
Slightly less than half of all respondents answered that, in their opinion, the preciseness of
tasks did not decrease towards the end of the deadline. 23 % of respondents each stated
that they estimate a significant and a small decrease in preciseness. While the answer
category “Small decrease in audit preciseness” can be interpreted a positive influence on
audit quality, it still means that sample sizes are adapted towards the end of the audit. This
would suggest that the auditors were under a lot of pressure – which can be seen in Table
6: Cross tabulation on the next page. Here, the frequency of responses for time pressure
(17 counts among all participants) catches one’s eye. Several interesting aspects can be
gained from this table. Firstly, the only other aspect of atmosphere next to time-pressure
which was also selected by respondents (one respondent to be exact) who estimated
decrease in preciseness to be significant is pressure from the client. Fearfulness towards the
boss one the other hand which, in reference to Appendix F made up only 1,1 % of total
answers, seemingly does not have any correlation with a decrease in preciseness. On the
contrary: The supervisor is more likely to be looking over the auditor’s shoulder to
examine the results and hence the auditing team is more motivated to work with full
scrutiny. If the pressure comes from the client, the likelihood that he might strike fear into
the hearts of auditors when he sees that they are slacking is miniscule – Since he most
likely cannot estimate whether the auditing team is working less precisely or not.
48
Katrin Wittke
International Business Management
From the significant percentage of responses that selected both having felt time-pressure
and estimating the effects of budget deadline on audit preciseness to be significant or, at
least, existing, a very simple conclusion can be drawn: Pressure from the client or the boss
can be alleviated through communication. Pressure from time that is running out cannot be
mitigated. Therefore, when push comes to shove, sometimes the only solution is to work
hastily and less precise or discuss with your team members to focus on the most important
tasks.
Table 6: Cross tabulation deadline quality and negative atmosphere
Deadline and Significant
Exactness
decrease
preciseness
Count
in % of
Total
Count
Small decrease in
% of
preciseness
Total
Total
Team-decision to Count
lessen preciseness % of
Total
No change in Count
preciseness
% of
Total
Count
% of
Total
Fearful
towards the
boss
0
Negative Atmosphere
Pressure
Under timefrom the
Stressful
pressure
client
1
0
5
Total
6
0,0%
3,3%
0,0%
16,7%
20,0%
0
1
2
4
7
0,0%
3,3%
6,7%
13,3%
23,3%
0
0,0%
0
0,0%
0
0,0%
1
3,3%
1
3,3%
1
3,3%
1
3,3%
7
23,3%
7
23,3%
16
53,3%
1
3
9
17
30
3,3%
10,0%
30,0%
56,7% 100,0%
Percentages and totals are based on responses.
Before moving on to the investigation of sample sizes, a look at the connection between
other, more positive attributes of atmosphere and changes in preciseness towards the
deadline is merited (please see Appendix H). The two other attributes which also showed a
connection with significant decreases in audit task preciseness are those that are normally
considered positive, nice working atmospheres. Both relaxed and friendly atmospheres
seem to encourage a working environment in which it is acceptable to relax scrutiny for
audit tasks.
For Question No.12 participants were asked to estimate how often they think it happens
that sample sizes, which have been predetermined in the audit planning stage, are adapted
in order to save time or simply make a task less strenuous. Again, first of all the
differences between the smaller and larger audit firms are examined. While on first glance
it seems that the smaller audit firms are less likely to change sample sizes during the audit
49
Katrin Wittke
International Business Management
process, a more detailed look might beg to differ. The percentages in Figure 4 are based on
total number of responses in each firm size category. This means that a quarter of all
respondents who worked in one of the Big Four audit firms do not think that sample sizes
are changed retroactively to save time. When it comes to the distribution of answers from
participants who think that sample sizes are adopted “often” or “all the time”, it seems that
the Big Four auditors are “worse” – 10 % of respondents from the larger firms stated that
retroactive adaptation happen “all the time”. Nevertheless, it lies in the eye of the beholder
to determine which is “worse – The cumulative percentage of both answers taken together,
i.e. 25 % of Big Four auditors estimate adaptations happening “all the time” or “often” – or
the 33 % of smaller firm auditors who answered “often”? In order to answer this,
admittedly very detail-oriented question, one would have to be able to determine what
frequencies the respondents associate with both categorizations.
60%
50%
50%
Percentage *
40%
40%
33%
30%
25%
Big Four Audit Firm
20%
17%
15%
10%
Smaller Audit Firm
10%
10%
0%
0%
0%
All of the
time
Often
On a regular
basis
Only in
extreme
situations
Never
Frequency of Sample Size Adaption
Figure 4: Frequency of sample size adaptation in large and small audit firms
*Percentages are based on the total number of responses in each firm size category
Next, the influence on quality will be examined, which is arguably a lot more significant
than sheer frequency of changes in audit procedures. Tables 7 and 8 are cross tabulations
between audit quality and audit preciseness and frequency of sample adaptations
respectively. What is remarkable that there were only four respondents who stated that in
their opinion the audit was less precise due to measures taken and should have been carried
out as planned: In Table 7, 33 % of participants who stated that towards the end of the
50
Katrin Wittke
International Business Management
Table 7: Cross tabulation preciseness and quality
Impact on audit quality
Audit was less
precise
Significant Count
decrease in
% of changes
preciseness
in preciseness
Small
Count
decrease in
% of changes
preciseness
in preciseness
Changes in
preciseness Teamdecision to
lessen
preciseness
No change
in
preciseness
Total
3
1
6
33,3%
50,0%
16,7%
100,0%
0
5
1
6
0,0%
83,3%
16,7%
100,0%
0
2
0
2
0,0%
100,0%
0,0%
100,0%
0
8
4
12
0,0%
66,7%
33,3%
100,0%
2
18
6
26
7,7%
69,2%
23,1%
100,0%
Count
% of changes
in preciseness
Count
% of changes
in preciseness
N/A
2
Count
% of changes
in preciseness
No negative impact
on audit quality
Total
Table 8: Cross tabulation: Frequency of sample adaptations and audit quality
Impact on audit quality
Audit was less
precise
All of the Count
time
%
of
Frequency
Often
Count
%
of
Frequency
Frequency On a regular Count
of Sample basis
%
of
Size
Frequency
Adaptations
Only
in Count
extreme
%
of
situations
Frequency
Never
Count
Total
%
of
Frequency
Count
%
of
Frequency
No negative impact
on audit quality
Total
N/A
1
1
0
2
50,0%
50,0%
0,0%
100,0%
0
4
1
5
0,0%
80,0%
20,0%
100,0%
1
1
0
2
50,0%
50,0%
0,0%
100,0%
0
10
1
11
0,0%
90,9%
9,1%
100,0%
0
3
3
6
0,0%
50,0%
50,0%
100,0%
2
19
5
26
7,7%
73,1%
19,2%
100,0%
audit, preciseness of audit tasks decreased significantly, also stated that the audit was less
precise.
51
Katrin Wittke
International Business Management
Similarly, the audit was deemed of lower quality by those people who estimate that sample
sizes are adapted “all of the time” or at least “on a regular basis” in order to save time.
This leaves the reader with the consoling solution that in order to have a negative impact
on the overall quality of the audit, there has to be a marked decrease in preciseness, and the
majority of respondents did not think that there were any negative effects on audit quality
due to changes in sample size frequency or decrease in preciseness.
52
Katrin Wittke
International Business Management
Conclusion
The purpose of this thesis was to give an overview of the developments in behavioral
research from three angles: from an economic standpoint, from the accounting point of
view, and from the perspective of the auditor.
All of these aspects have something in common: They are human constructs, built by
individuals who were trying to represent life, society, cooperation with other individuals.
Admittedly, this was not a thesis on sociology, but the idea of finding humanity in all these
different systems that spread across the globe is comforting – even though the homo
sapiens only recently began inhabiting them. Through the development of a habitable
environment built on assumptions which reflect reality and his characteristics, the
possibilities for future research and the areas for practical application are plentiful
Research in each of the three areas has had its peaks and its pitfalls, it had geniuses and
obstacles which barred the way to further accomplishments. Regarding the current state of
studies and the possibilities for the future, it is safe to say that research has not yet peaked
fully. There is still a lot of possibilities where humans can come together – scientists and
psychologists, economists and sociologists, since while the building of bridges between
these gaps has commenced, we are just not there yet. Every one of these fields of research
has unknowns which will be discovered and understood at some point. And if
interdisciplinary research is encouraged, humanity might just get there faster. Because
what we need, is not homo economicus. It is homo sapiens.
53
Katrin Wittke
International Business Management
List of References
Altman, M 2006, Handbook of contemporary behavioral economics. Foundations and
developments, M.E. Sharpe; Eurospan [distributor], Armonk, N.Y, London.
Argyris, C 1952, The Impact of Budgets on People, Controllership Foundation, New York.
Available from: http://hdl.handle.net/2027/mdp.35128000213536 [15 August 2013].
Argyris, C 1953, 'Human Problems with Budgets', Harvard Business Review, vol. 31, no. 1, pp.
97–110. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=6775504&site=ehost-live
[18 August 2013].
Armet, N 2013, 'Buyer's remorse - but no sour grapes', Money Management, vol. 27, no. 21, pp.
22–23. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=88935832&site=ehost-live
[03 August 2013].
Bamber, EM 1993, 'Opportunities in Behavioral Accounting Research', Behavioral Research in
Accounting, vol. 5, p. 1. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=3957603&site=ehost-live
[03 July 2013].
Barberis, NC 2013, 'Thirty Years of Prospect Theory in Economics: A Review and Assessment',
Journal of Economic Perspectives, vol. 27, no. 1, pp. 173–196. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=85292941&site=ehost-live
[03 July 2013].
Bazerman, MH & Moore, DA 2013, Judgment in Managerial Decision Making, John Wiley &
Sons, Chichester.
Bedard, JC & Wright, AM 1994, 'The functionality of decision heuristics: Reliance on prior audit
adjustments in evidential.', Behavioral Research in Accounting, vol. 6, p. 62. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9510180831&site=ehost-live
[19 August 2013].
Birnberg, JG 1986, 'Discussion of Covaleski and Aiken', Accounting, Organizations & Society, vol.
11, 4/5, pp. 321–325. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=5417626&site=ehost-live
[08 April 2013].
Birnberg, JG & Nath, R 1967, 'Implications of Behavioral Science for Managerial Accounting',
Accounting Review, vol. 42, no. 3, pp. 468–479. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4481967&site=ehost-live
[02 July 2013].
Bonner, SE 1999, 'Judgment and Decision-Making Research in Accounting', Accounting Horizons,
vol. 13, no. 4, pp. 385–398. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=2811298&site=ehost-live
[10 March 2013].
Caplan, EH 1966, 'Behavioral Assumptions of Management Accounting', Accounting Review, vol.
41, no. 3, pp. 496–509. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4515926&site=ehost-live
[16 August 2013].
54
Katrin Wittke
International Business Management
Caplan, EH 1971, Management accounting and behavioral science, Addison-Wesley Pub. Co,
Reading, Mass.
Carcello, JV, Hermanson, RH & McGrath, NT 1992, 'Audit Quality Attributes: The Perceptions of
Audit Partners, Preparers, and Financial Statement Users', Auditing, vol. 11, no. 1, pp. 1–15.
Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9703122164&site=ehost-live
[25 March 2013].
Cohen, J & Kida, T 1989, 'The Impact of Analytical Review Results, Internal Control Reliability,
and Experience on Auditors' Use of Analytical Review', Journal of Accounting Research, vol. 27,
no. 2, pp. 263–276. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=6414667&site=ehost-live
[05 August 2013].
Colville, I 1981, 'Reconstructing "Behavioural Accounting"', Accounting, Organizations & Society,
vol. 6, no. 2, pp. 119–132. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=5417607&site=ehost-live
[20 March 2013].
Covaleski, M & Aiken, M 1986, 'Accounting and Theories of Organizations: Some preliminary
considerations', Accounting, Organizations and Society, vol. 11, 4–5, pp. 297–319. Available from:
http://www.sciencedirect.com/science/article/pii/0361368286900024 [28 May2013].
Daugherty, BE, Dickins, D, Hatfield, RC & Higgs, JL 2012, 'An Examination of Partner
Perceptions of Partner Rotation: Direct and Indirect Consequences to Audit Quality', Auditing, vol.
31, no. 1, pp. 97–114. Available from: 10.2308/ajpt-10193 [18 August 2013].
Daugherty, B, Dickins, D, Higgs, J & Tatum, K 2013, 'The Question of Mandatory Audit Firm
Rotation', CPA Journal, vol. 83, no. 1, pp. 28–33. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=87368391&site=ehost-live
[18 August 2013].
Emby, C & Finley, D 1997, 'Debiasing Framing Effects in Auditors' Internal Control Judgments
and Testing Decisions', Contemporary Accounting Research, vol. 14, no. 2, pp. 55–77. Available
from: http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9710215724&site=ehostlive [19 August 2013].
Frerichs, S 2011, 'False Promises? A Sociological Critique of the Behavioural Turn in Law and
Economics', Journal of Consumer Policy, vol. 34, no. 3, pp. 289–314. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=65020952&site=ehost-live
[21 April 2013]..
Gillenkirch, RM & Arnold, MC 2008, State of the Art des Behavioral Accounting. Available from:
https://www.google.de/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CDMQFj
AA&url=http%3A%2F%2Fwww.unigoettingen.de%2Fde%2Fdocument%2Fdownload%2F412bdf7bc8d608b6327f1504ff87d8b7.pdf%
2Frgma_behacc.pdf&ei=RbGkUZyVJqeu4ATC8oGoBQ&usg=AFQjCNEXorJniBVPCKfcDai8j1
BhEFU7eg&sig2=m1g_FV76ps_WLP9TrBFyGg&bvm=bv.47008514,d.bGE [28 May 2013].
Guckelsberger, U 2005, Das Menschenbild in der Ökonomie. Ein dogmengeschichtlicher
Abriß, Ludwigshafen. Available from: http://web.fhludwigshafen.de/fb2/guckelsberger.nsf/Files/1D61686B4BEEC666C1256F9E00412045
[08 July 2013].
55
Katrin Wittke
International Business Management
Hatfield, RC 2001, 'The Effect of Staff Accountant Objectivity in the Review and Decision
Process: A Tax Setting', Journal of the American Taxation Association, vol. 23, no. 1, pp. 61–74.
Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=6479753&site=ehost-live
[11 August 2013].
Heuser, UJ 2008, Humanomics. Die Entdeckung des Menschen in der Wirtschaft, Campus-Verl.,
Frankfurt, M, New York, NY.
Hofstedt, TR 1976, 'Behavioral Accounting Research: Pathologies, Paradigms and Prescriptions',
Accounting, Organizations & Society, vol. 1, no. 1, pp. 43–58. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=10237876&site=ehost-live
[08 April 2013].
Hofstedt, TR & Kinard, JC 1970, 'A Strategy for Behavioral Accounting Research', Accounting
Review, vol. 45, no. 1, p. 38. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4483415&site=ehost-live
[11 August 2013].
International Federation of Accountants 2009, International Standard on Auditing 200, Geneva,
Switzerland.
Jasay, A de 2011, 'Suckers, punters, pathbreakers: when homo oeconomicus is selflessly selfish',
CATO Journal, vol. 31, no. 2, pp. 377–387. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=63192492&site=ehost-live
[21 April 2013].
Jones, DM 1976, 'Behavioural Aspects of Management Accounting', Management Decision, vol.
14, no. 1, pp. 17–24.
Joyce, EJ & Biddle, GC 1981, 'Anchoring and Adjustment in Probabilistic Inference in Auditing',
Journal of Accounting Research, vol. 19, no. 1, pp. 120–145. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=6406102&site=ehost-live
[31 July 2013].
Kahneman, D & Tversky, A 1979, 'Prospect Theory: An Analysis of Decision Under Risk',
Econometrica, vol. 47, no. 2, pp. 263–291.
Karafyllis, NC 2002, Zugänge zur Rationalität der Zukunft, Metzler, Stuttgart.
Knapp, MC & Knapp, CA 2012, 'Cognitive Biases in Audit Engagements', CPA Journal, vol. 82,
no. 6, pp. 40–45. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=87403260&site=ehost-live
[25 July 2013].
Knechel, WR 2000, 'Behavioral Research in Auditing and Its Impact on Audit Education', Issues in
Accounting Education, vol. 15, no. 4, pp. 695–712. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=3854226&site=ehost-live
[25 March2013].
Knechel, WR & Vanstraelen, A 2007, 'The Relationship between Auditor Tenure and Audit
Quality Implied by Going Concern Opinions', Auditing, vol. 26, no. 1, pp. 113–131. Available
from: http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24690198&site=ehost-live
[19 August 2013].
56
Katrin Wittke
International Business Management
Kroll, K 2012, 'Mandatory Auditor Rotation: Where Things Stand', Financial Executive, vol. 28,
no. 2, pp. 42–45. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=74476418&site=ehost-live
[18 August 2013].
Libby, R 1985, 'Availability and the Generation of Hypotheses in Analytical Review', Journal of
Accounting Research, vol. 23, no. 2, pp. 648–667. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=6437936&site=ehost-live
[01 August 2013].
Libby, R & Frederick, DM 1990, 'Experience and the Ability to Explain Audit Findings', Journal
of Accounting Research, vol. 28, no. 2, pp. 348–367. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=6414812&site=ehost-live
[19 August 2013].
March, JG & Simon, HA 1958, Organizations, Wiley, New York.
McMillan, JJ & White, RA 1993, 'Auditors' Belief Revisions and Evidence Search: The Effect of
Hypothesis Frame, Confirmation Bias, and Professional Skepticism', Accounting Review, vol. 68,
no. 3, pp. 443–465. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9312211767&site=ehost-live
[30 July 2013].
Meyer, M & Rigsby, JT 2001, 'A Descriptive Analysis of the Content and Contributors of
Behavioral Research In Accounting 1989-1998', Behavioral Research in Accounting, vol. 13, p.
253. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=4284270&site=ehost-live
[28 May 2013].
Mill, JS 1848, reprinted in 2012, The Principles of Political Economy, CreateSpace Independent
Publishing Platform.
Persky, J 1995, 'The Ethology of Homo Economicus', Journal of Economic Perspectives, vol. 9,
no. 2, pp. 221–231. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9506261428&site=ehost-live
[04 July 2013].
Peters, JM 1993, 'Decision making, cognitive science and accounting: An overview of the
intersection', Accounting, Organizations and Society, vol. 18, no. 5, pp. 383–405. Available from:
http://www.sciencedirect.com/science/article/pii/0361368293900388 [01 August 2013].
Riahi-Belkaoui, A 2002, Behavioral management accounting, Quorum Books, Westport, CT.
Sen, AK 1977, 'Rational Fools: A Critique of the Behavioral Foundations of Economic',
Philosophy & Public Affairs, vol. 6, no. 4, pp. 317–344.
Shields, MD, Solomon I.R.A. & Waller, WS 1988, 'Auditor's usage of unaudited book values when
making presampling audit value estimates', Contemporary Accounting Research, vol. 5, no. 1, pp.
1–18. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=10938566&site=ehost-live
[05 August 2013].
Shields, MD 2009, '"What a Long, Interesting Trip it's Been" through the Behavioral Accounting
Literature: A Personal Perspective', Behavioral Research in Accounting, vol. 21, no. 2, pp. 113–
116. Available from:
57
Katrin Wittke
International Business Management
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=43248474&site=ehost-live
[16 April 2013].
Simon, HA 1964, Models of man, Wiley & Sons, Inc.
Simon, HA 1981, Entscheidungsverhalten in Organisationen. Eine Untersuchung von
Entscheidungsprozessen in Management und Verwaltung, Verl. Moderne Industrie, Landsberg am
Lech.
Smith, A 1759, reprinted 1977, Theorie der ethischen Gefühle, Felix Meiner, Hamburg.
Smith, A 1776, reprinted in 1991, The wealth of nations, David Campbell Publishers, London.
Steele, GR 2004, 'Understanding Economic Man', American Journal of Economics & Sociology,
vol. 63, no. 5, pp. 1021–1055. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=15286038&site=ehost-live
[16 April 2013].
Thaler, R 1980, 'Toward a positive theory of consumer choice', Journal of Economic Behavior &
Organization, vol. 1, no. 1, pp. 39–60.
Thompson, JD 1967, Organizations in action; Social science bases of administrative theory,
McGraw-Hill, New York.
Trotman, KT 2011, 'A Different Personal Perspective through the Behavioral Accounting
Literature', Behavioral Research in Accounting, vol. 23, no. 1, pp. 203–208. Available from:
http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=57736272&site=ehost-live
[12 May 2013].
Tversky, A & Kahneman, D 1974, 'Judgment under Uncertainty: Heuristics and Biases', Science
(New York, N.Y.), vol. 185, no. 4157, pp. 1124–1131.
Tversky, A & Kahneman, D 1973, 'Availability: A heuristic for judging frequency and probability',
Cognitive Psychology, 5(2), pp. 207–232. Available from: http://dtserv2.compsy.unijena.de/__C1257641005FF6B0.nsf/0/1538BC6A54743092C125764700444391/$FILE/TVERSKY
%20Availability%20A%20heuristic%20for%20judging%20frequency%20and%20probality.pdf
[31 July 2013].
Vasek, T 2012, 'Ohne Vernunft und Verstand' 29 November. Available from:
http://www.theeuropean.de/thomas-vasek-2/5448-den-homo-oeconomicus-gibt-es-nicht [10 July
2013].
Wilkinson, N 2008, An introduction to behavioral economics, Palgrave Macmillan, New York.
Wüstemann, J & Koch, C 2007, A review of bias research in auditing: combining psychological
and economic research. Working Paper, Mannheim. Available from:
http://aaahq.org/meetings/AUD2009/AReviewOfBias.pdf [04 August 2013].
58
Katrin Wittke
International Business Management
Appendix
A. Prospect Theory Formula and EUT Formula
Example of a gamble. Source: Barberis, NC 2013, 'Thirty Years of Prospect Theory in Economics: A
Review and Assessment'
B. Survey Outline
Part 1: Welcome
Thank you for agreeing to take this survey.
Your answers will be handled with complete anonymity and will strictly be used for
analysis in my Bachelor Thesis.
The survey consists of fourteen questions and should take between five to ten minutes. We
will begin with general information and move on to your experience in audit firms and
with auditing processes.
Part 2: General Information
1. How old are you?
[Open Question]
2. How long have you worked in an auditing firm / department?
 Less than 3 months
 3 to 6 months
 7 to 12 months
If you have worked for more than one year, please fill in the overall
duration of work experience: _____________ [Open Question]
59
Katrin Wittke
3.
International Business Management
Did the company belong to one of the big four auditing firms (KPMG, Ernst &
Young, PWC, Deloitte & Touche)?
 Yes
 No
 I’d rather not say
4. Are you still working in the auditing sector?
 Yes
 No
5. What position did you hold in that firm?
 Intern
 Student worker
 Full-time employee
 Other (please specify): __________ [Open Question]
Part 3: Work Experience
6. Did you participate in one or more year end audits?
 Yes, for a small firm
 Yes, for a medium firm
 Yes, for a large firm
 Yes, for more than one firm
 Other (please specify): ________ [Open Question]
7. How large were your audit teams in general?
Please answer even if you answered the previous question with no / other.




2-3 people
4-5 people
6-9 people
10 people or more
8. How would you describe the working atmosphere in your audit team?
More
than
one
answer
may
be






Relaxed
Serious
Informal
Under time-pressure
Stressful
Friendly
given.
 Competitive
 Fearful (towards “the
boss”)
 Pressure from “the client”
 Other (please specify): __________
60
Katrin Wittke
International Business Management
9. How would you rate the degree of involvement of the auditing team in the planning
process of the audit?
 Low
 Medium
 High
 NA
10. Regarding your previous answer, do you think the auditing team should be:
 More involved in the planning process
 Less involved in the planning process
 No change is necessary.
 Other (please specify): _________ [Open Question]
Part 4: Auditing Process
11. Would you say that towards the deadline of the auditing process the preciseness for
some tasks decreased?
 Yes, significantly
 Yes, but not in a large way
 Yes, it was a team-decision to focus on other tasks
 No, even towards the deadline we would work with full scrutiny and
preciseness.
 Other (please specify) : ________ [Open Question]
12. Based on your personal experience in auditing, how often do you think it happens
that previously set sample sizes are reduced in order to make a task easier or less
time-intensive?
 All of the time
 Often
 On a regular basis
 Only in extreme situations
 Never
 Other (please specify): _________ [Open Question]
13. If the previous answer was “Yes”:
In your opinion, were there consequences to the audit result and its quality due to
the changes?
 I think the audit was less precise and should have been carried out as
planned
 I do not think there was a negative impact on the overall quality of the audit
 NA
 Other (please specify): ___________ [Open Question]
61
Katrin Wittke
International Business Management
Part 5: General Satisfaction
14. Please comment on any factors you were not satisfied with. If you have any
suggestions for improvement, we'd like to hear them.
[Open Question]
[End of Survey]
62
Katrin Wittke
International Business Management
C. Distribution of respondents by age
Age
Valid
23
24
25
27
28
29
30
35
37
39
42
43
Total
Missing System
Total
Frequency
3
8
6
1
6
3
1
1
1
1
2
1
34
1
35
Percent
8,6
22,9
17,1
2,9
17,1
8,6
2,9
2,9
2,9
2,9
5,7
2,9
97,1
2,9
100,0
Valid
Percent
Cumulative
Percent
8,8
23,5
17,6
2,9
17,6
8,8
2,9
2,9
2,9
2,9
5,9
2,9
100,0
8,8
32,4
50,0
52,9
70,6
79,4
82,4
85,3
88,2
91,2
97,1
100,0
Mean
28,26
Median
26,00
D. Positions held by respondents within the firm
Job Position
Frequency
Valid Intern
Working
Student
Full-time
Employee
Manager
Partner
Total
Percent
Valid
Percent
Cumulative Percent
11
31,4
31,4
31,4
8
22,9
22,9
54,3
14
40,0
40,0
94,3
1
2,9
2,9
97,1
1
2,9
2,9
100,0
35
100,0
100,0
63
Katrin Wittke
International Business Management
E. Distribution of size of audited firms
Audited Firms
70,0%
17
Percentage of total
60,0%
50,0%
40,0%
30,0%
Big Four Firm
20,0%
Smaller Firm
10,0%
1
1
3
3
1
3
0
0,0%
Small firm Medium firm Large firm
More than
one firm
Audited Firms
F. Cross tabulation: Team size and audit firm size
Team Size
Yes Count
% within Firm
Big Four
Size
Audit Firm? No
Count
% within Firm
Size
Total
Count
%
within
Total Answers
2-3
4-5
6-9
10 people
people
people
people
or more
Total
9
5
6
3
23
39,1%
21,7%
26,1%
13,0%
100,0%
1
5
0
0
6
16,7%
83,3%
0,0%
0,0%
100,0%
10
10
6
3
29
34,5%
34,5%
20,7%
10,3%
100,0%
64
Katrin Wittke
International Business Management
G. Frequency of answers on atmosphere
Pressure from the client
3,4 %
Fearful towards the boss
1,1 %
Atmosphere
Competitive
2,2 %
Stressful
11,2 %
Under time-pressure
20,2 %
Serious
19,1 %
Informal
11,2 %
Friendly
21.3 %
Relaxed
10,1 %
0
2
4
6
8
10
Frequency of Answers*
12
14
16
18
20
*Percentages are based on total amount of answers.
65
Katrin Wittke
International Business Management
Preciseness and Atmosphere
66