Could the level of personal indebtedness influence an auditor\u27s professional decision-making process?

This research examines the effect of auditors\u27 personal debt on their audit decision making. We developed two different background scenarios that vary the level of the auditor\u27s personal debt. While one scenario indicated that the partner lived a modest lifestyle and was relatively free of debt, the other indicated that the partner lived an expensive lifestyle and had considerable personal debt. Our data indicate that auditors receiving the higher personal indebtedness scenario were more likely to believe that the auditor in the case study would sign-off on the audit without doing any additional work. We also found that the propensity to believe that the auditor in the case study would sign-off on the audit without doing any additional work decreased as the participants\u27 rank within the firm increased. Our research documents that a partner\u27s level of indebtedness could influence the participant\u27s audit decisions

Moral Judgment and Causal Attributions: Consequences of Engaging in Earnings Management

Recent, well-publicized accounting scandals have shown that the penalties outsiders impose on those found culpable of earnings management can be severe. However, less is known about how colleagues within internal labor markets respond when they believe fellow managers have managed earnings. Designers of responsibility accounting systems need to understand the reputational costs managers impose on one another within internal labor markets. In an experimental study, 159 evening MBA students were asked to assume the role of a manager in a company and respond to a scenario in which another manager (the target manager) has the opportunity to engage in earnings management. Participants provided causal attributions, assessed the morality of the target manager, and indicated whether they would change their judgments about the target manager’s reputation. The study manipulated three between-subjects factors: (1) whether the target manager chose to engage in earnings management, (2) whether the company’s budgetary control system was rigid or flexible, and (3) whether the target manager’s work history was average or above average. We found that causal attributions are affected more by the budgetary systems when the target did not manage earnings than when the manager did. We also found that morality judgments were significantly associated with the target manager’s behavior, but not with the budgetary system. In addition, participants’ judgments about the target manager’s reputation were more strongly associated with morality judgments than with causal attributions. We discuss implications of the role of reputation in management control systems design. Copyright Springer Science+Business Media B.V. 2007budgetary control system, causal attributions, earnings management, moral judgment, work history,

Expectation Gap and Corporate Fraud: Is Public Opinion Reconcilable with Auditors’ Duties?

The objective of this paper is to answer the key question of whether auditors’ view of their fraud detection duties is reconcilable with the public’s view. We perform a content analysis of press articles covering 37 U.S. corporate fraud cases discovered during the period 1992-2005. We compare the auditors’ duties (as described by the auditing standards) with the public opinion represented by these press articles. Consistent with Porter (1993), we identify three types of divergence between public expectations and auditing standards: deficient performance (that we label “Type 1”), deficient standards (“Type 2”) and unreasonable expectations (“Type 3”). The Type 1 gap can be reduced by strengthening auditors’ willingness and ability to apply existing auditing standards on fraud detection. The Type 2 gap can be narrowed by improving the existing auditing standards. The Type 3 gap, however, concerns highly subjective criteria beyond the auditors’ usual sphere of control. The results of our analysis confirm that the expectation gap is unlikely to disappear given that the rational auditor is unable or unwilling to assess the subjective components of fraudulent behavior, and that value judgments, as demonstrated in the media, retain their popularity

Social Media as a Form of Virtual Whistleblowing: Empirical Evidence for Elements of the Diamond Model

This article originally advances the field of organizational whistleblowing by empirically investigating the suitability of the four elements of the fraud diamond as a means to understand the intention to disclose wrongdoing through virtual channels. This article also makes a contribution on the theme of whistleblowing as it relates to customers, an under-studied, however, relevant stakeholder in this field. The main findings of the article are as follows: (a) the four elements of the fraud diamond as they relate to whistleblowing—a combination of pressure, financial incentive, opportunity and rationalization, and capability—can explain the intentions behind customer reports of wrongdoing; (b) online social media channels are customers’ preferred means of whistleblowing; (c) the elements of opportunity and capability are strongly correlated with the use of social media as a method of disclosing wrongdoing; and (d) virtual channels can be useful for whistleblowers in order to avoid potential retaliation. Unique managerial and academic implications of these research findings are also discussed, extending the layers of knowledge on whistleblowing in organizations