Effects of Client Pressure and Audit Firm Management Control Systems on Auditor Judgments

61 Pages Posted: 3 Mar 2015

See all articles by Christopher Koch

Christopher Koch

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management

Steven Salterio

Queen's University - Smith School of Business

Date Written: February 27, 2015

Abstract

We examine the effects of pressures from client management and the audit firm’s own management control systems (MCS) on auditors’ willingness to accept an aggressive accounting that is preferred by client management. We find that auditors perceiving more pressure from client management to accept the client’s aggressive accounting react by increasing the size of the proposed adjustment needed to bring the client’s accounting into conformity with GAAP. However, we find that when client management promotes the jointness of interests they share with the auditor or the audit firm’s MCS focuses the auditor more on client service quality the auditor experiences increased affinity for the client and proposes lower adjustments in response to the same accounting facts. Furthermore, we find that the auditor’s proposed adjustment to client accounting leads to intended use of negotiation tactics that are consistent with the relative size of the proposed adjustment: larger proposed adjustments result in relatively greater auditor intentions to use contending tactics whereas smaller adjustments lead to increased intentions to use compromising tactics. Two implications emerge from our research. First, that client management, if subtle with its use of pressure, can nudge auditors towards accepting the aggressive accounting management wants. Second, the audit firm’s own MCS can facilitate auditor identification with client needs leading to a lesser willingness by auditors to challenge aggressive client management accounting.

Keywords: Client pressure, customer relationship management, client service quality, management control systems, motivated reasoning, negotiation, accounting policy acceptance

JEL Classification: M4

Suggested Citation

Koch, Christopher and Salterio, Steven E., Effects of Client Pressure and Audit Firm Management Control Systems on Auditor Judgments (February 27, 2015). Available at SSRN: https://ssrn.com/abstract=2572486 or http://dx.doi.org/10.2139/ssrn.2572486

Christopher Koch

Johannes Gutenberg University Mainz - Gutenberg School of Economics and Management ( email )

Mainz
Germany
+49 (6131) 3929990 (Phone)

HOME PAGE: http://https://www.cg.bwl.uni-mainz.de/

Steven E. Salterio (Contact Author)

Queen's University - Smith School of Business ( email )

Kingston, Ontario K7L 3N6
Canada
613-533-6926 (Phone)

HOME PAGE: http://smith.queensu.ca/faculty_and_research/faculty_list/salterio-steven.php

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