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RESEARCH SEMINAR SESSION 1, 2003.

A QUALITATIVE EXAMINATION OF MANAGEMENT CONTROL

SYSTEMS IN LARGE AUDIT FIRMS

presented by

Breda Sweeney

National University of Ireland, Galway Date: Friday 7th March

Time: 2:00 p.m. to 3:30

Where: Quad 3005 (Early start due to Vernon Smith presentation.)

The University of NSW School of Accounting

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A QUALITATIVE EXAMINATION OF MANAGEMENT CONTROL SYSTEMS IN LARGE AUDIT FIRMS

Breda Sweeney and Bernard Pierce

National University of Ireland, Galway and Dublin City University Abstract Audit firms face a constant conflict between the business of auditing and the profession of auditing, characterised in the literature as a cost-quality conflict. This conflict is manifested at trainee levels in the pressure to perform quality work within specified time limits. Prior studies have reported high levels of quality threatening behaviour (QTB) at trainee levels and the importance of examining contributory factors has been highlighted. Multivariate models, based on large-scale surveys have identified some important variables, but calls have been made for in-depth studies to develop a more complete understanding and help refine previous models of auditor behaviour. The objective of this study, the first of its kind, is to conduct a qualitative investigation of how control system variables operate in audit firms and the perceived impact of those variables on QTB. Based on a framework constructed from the management control literature, the study adopted a qualitative approach using 25 semi-structured interviews of audit seniors in four of the (then) Big Five firms in Ireland. The findings suggest that key variables (time pressure, participative target setting, style of performance evaluation and audit review process) have been inadequately operationalised in previous studies. Time pressure emanates not from a single source as suggested previously but from a triad of sources, the balance of which varies over time and is influenced by a range of factors. Participation is heavily influenced by the source of pressure but there is also evidence of a strong interaction between the opportunity for participation and reporting structures. Flatter reporting structures are now in place, promoting asymmetry in the direction of the manager, who is likely to develop more detailed knowledge of all audit areas, and away from the senior who is less likely to be exposed to areas covered by more junior staff. Regarding style of performance evaluation, informal evaluations were reported to be of greater importance than formal evaluations. The shift in performance evaluation approach is not only related to the external economic conditions, but is also facilitated by more regular contact with staff at all levels. The style of audit review has changed to a ‘review by interview’ in audit firms, facilitating more interaction between the manager and the audit team. All of these changes are consistent with the concept of interactive control and a movement away from a diagnostic control system. There is evidence however, that the effectiveness of these interactive controls has been reduced due to understaffing in audit firms at the time of the study. Overall, the study has provided important insights into the nature of the specified variables and their association with QTB. Contributions to the management control literature and areas for future research are outlined.

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A QUALITATIVE EXAMINATION OF MANAGEMENT CONTROL SYSTEMS IN LARGE AUDIT FIRMS

Breda Sweeney and Bernard Pierce National University of Ireland, Galway and Dublin City University

INTRODUCTION

Previous studies have shown that staff auditors engage in a wide variety of behaviours that threaten audit

quality (Alderman and Deitrick, 1982; Otley and Pierce, 1996a; Malone and Roberts, 1996), collectively

referred to as quality threatening behaviour, or QTB (Pierce and Sweeney, 2002). QTB is defined as any

behaviour by auditors which has the potential to adversely affect audit quality and includes such behaviours

as prematurely signing off tests without completing all the work, biasing sample selection and making

unauthorised reductions in sample sizes. The majority of prior studies have been carried out in the US and

almost all have used either survey questionnaires or experiments to collect data, some of which have sought

to explain the occurrence of QTB using multivariate models. Pierce and Sweeney (2002) adopted the latter

approach and in common with prior research, although their regression model was significant, its

explanatory power was low. They suggested that a likely reason for the low explanatory power is the

changes that have taken place in the audit environment resulting in inadequate operationalisation of variables

and that there is, therefore, a need for research of a more in-depth nature to refine previous models of

dysfunctional behaviour. However, there are major challenges involved in using in-depth methods of

research on sensitive topics and this has been highlighted by a severe shortage of field studies on areas which

could be perceived as threatening for the audit (Gendron and Bedard, 2001) 1.

The purpose of this study is to apply a qualitative research approach to the development of a deeper

understanding of control system variables previously shown to be related to the incidence of QTB, and to

inductively develop some tentative propositions relating to those variables. The study contributes to the

overall contingency literature by demonstrating the contribution of qualitative studies in further developing

contingent models of control systems. The study also represents a response to calls made in the literature for

more in-depth studies of management control issues (e.g. Chapman, 1997; Otley, 1994).

The paper is organised as follows. Firstly, background literature which draws on contingency theory

literature and previous empirical studies of management control in the audit environment is summarised. The

variables examined in the study are then identified and the research method is described. The findings are

then presented and the final section provides a discussion of these findings along with implications of the

findings and possible areas for future research.

This paper is in the early stages of development. Please do not quote without written permission from the authors.

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CONTINGENCY THEORY OF MANAGEMENT CONTROL

Different theories adopting economic and behavioural views of organisations are used in the management

control literature to gain a better understanding of control issues in organisations. This study is set in the

behavioural management control literature and a contingent view of control systems is adopted.

In the context of management control, contingency theory holds that the most appropriate control system in

any organisation is contingent on the circumstances within and surrounding the organisation. Contingency

theory is based around three building blocks (Otley, 1980): contingent factors (the environment or

organisation context), control systems and an outcome variable (some measure of organisational

effectiveness) (figure 1).

Figure 1: The minimum necessary contingency framework for management control (adapted from Otley, 1980)

Many different contingent variables such as the environment, technology, strategy and culture have been

examined in previous studies. Some of these studies have developed theoretical relationships between

contingent variables and control systems (Waterhouse and Tiessen, 1978), while others have empirically

examined control processes in organisations to test these (Govindarajan, 1984). In order to apply the

contingency framework to the control process it is necessary to identify specific aspects of the control system

which are associated with defined circumstances and demonstrate an appropriate matching in terms of

organisational effectiveness (Otley, 1980). Organisational effectiveness is not easily measured and

researchers have therefore tended to concentrate on different functional and dysfunctional outcomes of the

control process as surrogate indicators of effectiveness. Functional outcomes have been divided into those

relating to the use or usefulness of management accounting systems, and to behavioural and organisational

outcomes (Chenhall, 2003). Dysfunctional outcomes are considered to be outcomes that are not in the

organisation’s best interest and include budgetary slack (Onsi, 1973) and data manipulation (Hopwood,

1972).

Many different definitions of management control have been put forward but it is generally understood to

refer to methods of inducing employees to achieve the objectives of the organisation (Emmanuel et al.,

Contingency Variables (e.g. Technology; Environment)

Organisational control package (AIS design, MIS design, Organisational design, Other control arrangements)

Organisational Effectiveness

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1990). Different types of controls are available to an organisation to achieve control and the categorisation of

controls has been performed in a number of ways by different researchers. Hopwood (1974a) categorised

controls into administrative, social, and self-control. Ouchi (1979) divided controls into three fundamentally

different mechanisms: market, bureaucracy, and clan. Emmanuel et al. (1990) presented five categories of

controls: personnel, behaviour, input, output and social. Simons (2000) referred to diagnostic and interactive

control systems, a distinction that relates to how the information is used by managers rather than the actual

content of the control information. He defined diagnostic control systems as ‘formal information systems that

managers use to monitor organizational outcomes and correct deviations from preset standards of

performance’ (p. 209) and interactive control systems as ‘formal information systems that managers use to

personally involve themselves in the decision activities of subordinates’ (p. 216). With diagnostic control

systems, the performance of lower level employees is controlled by monitoring deviations from target on a

number of defined criteria. With interactive control systems however, face-to-face meetings with

subordinates are used to ‘probe subordinates to explain any unforeseen changes in their business and offer

suggested action plans’ (p. 218). The same accounting information can be used in a diagnostic or interactive

manner to control an organisation. Management control literature has consistently emphasised the

importance of understanding the limitations of accounting controls and the role of other forms of control,

particularly in relatively unprogrammed situations (Emmanuel et al., 1990).

Accounting controls

Accounting information is provided within organisations as a means of assisting managers to adapt their

activities so that they can continue to achieve the organisation’s objectives in the face of environmental and

internal changes, and therefore it should have a considerable role to play in the control process (Emmanuel et

al., 1990). Despite heavy criticisms (Bunce et al., 1995) budgets are the most widely used management

accounting control tool (Horngren et al., 2003). Argyris (1952) was the first published study to report the

effects of using budgets on the behaviour of employees and more recently, a substantial body of literature

has developed on budgeting and its behavioural implications in various work settings (Birnberg and Sadhu,

1986). They suggested that a model of the process by which accounting budgets and reports are utilised in

organisations is emerging from these studies. Three issues of critical importance to this process are the

degree of difficulty of budget targets (Emmanuel et al., 1990; Hofstede, 1968), the level of participation in

setting those targets (Shields and Shields, 1998; Brownell, 1982), and the extent of reliance on the targets for

performance evaluation (Hopwood, 1972; Otley, 1978). Research studies on each of these areas are reviewed

in the following sections.

Budget targets

The specificity and level of attainability of budget goals have received considerable attention in the literature

(Hirst, 1987). Two dominant frameworks (expectancy theory and goal setting theory) have emerged to

explain the performance effects of setting performance goals and to guide decisions on specificity and

difficulty of budgets (Kren and Liao, 1988). Both of these theories suggest that performance will increase up

to a certain level of budget difficulty but will decrease beyond that, consistent with an inverted U-shaped

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relationship between budget tightness and performance (Emmanuel et al., 1990). Empirical findings

regarding the motivational impact of setting budget goals have not, however, been consistent. Hirst (1987)

cautioned against relying too heavily on the psychological literature as little attention has been given to why

goal setting works and to the moderating variables that can limit its effectiveness. He suggested that where

task uncertainty is high, setting budget goals is less effective in promoting task performance than where task

uncertainty is low.

Participation

The accounting literature generally defines participative budgeting as a process in which an individual is

involved with, and has influence on, the determination of his or her budget (Shields and Shields, 1998). A

distinction is made between involvement and influence and for participation to exist, both are considered

necessary. Pseudo-participation, a term coined by Argyris (1952), is defined as involvement and the promise

of influence but after the event the subordinate believes that he or she had no real influence.

The benefits of participation are held to be vertical information sharing, co-ordinating interdependence and

improving motivation and attitudes (Shields and Shields, 1998). Shields and Shields (1998) identified the

antecedents of these benefits/reasons for participation to be information asymmetry along with task and

environmental uncertainty, and task interdependence. Brownell (1982) demonstrated how specific variables

from four major classes (cultural, organisational, interpersonal, and individual) influence the relationship

between participation and its consequences, classifying the first two of these categories as antecedent

moderators and the latter two as consequent moderators. If participation is implemented in situations where

it is not considered appropriate such as where the antecedent conditions do not exist, it can result in

budgetary slack (Hopwood, 1974; Schiff and Lewin, 1970). Schiff and Lewin (1970) conducted an extensive

analysis of the budget and control process in different divisions of three very large firms, and reported that

during the budget formulation stage, divisional managers deliberately build slack into their budgets. They

concluded that the traditional participative budgeting process does not necessarily result in the optimal use of

resources. Not alone has participation been linked to budget slack, it has also been linked to excessively tight

budgets (Otley, 1978), where managers were generally optimistic in setting their budget estimates and

submitted figures that were only infrequently attained.

Overall, the literature highlights a need for a better understanding of the reasons why participative budgeting

exists (Shields and Shields, 1998) and of the antecedents and outcomes of participative budgeting (Brownell,

1982).

Style of performance evaluation

The degree of reliance on accounting performance measures as a measure of supervisory style of evaluation

and behaviours associated with this style has been the focus of much research in the area of management

control (Hartmann, 2000; Brownell and Dunk, 1991). Argyris (1952) was the first to distinguish between the

technical features of an accounting control system and the style of use of accounting information, and the

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topic commanded strong research interest following publication of apparently contradictory findings by

Hopwood (1972) and Otley (1978).

Hopwood (1972) provided evidence that where accounting information is an imperfect means of measuring

true performance, the use of a rigid style of evaluation (budget-constrained style) is inappropriate, and leads

to dysfunctional consequences such as high degrees of job-related tension, and poor relationships with both

colleagues and subordinates. Hopwood argued that accounting measurements are by their nature imperfect

and that it is important to understand how accounting information can be used to mitigate the observed

dysfunctional effects of a budget-constrained style of performance evaluation. He suggested that the profit-

conscious style, which is a more flexible style of budget use, promotes co-operation and reduces negative

consequences, and also that the way in which managers use budgets is a key determinant of the budget’s

effectiveness.

Otley (1978) replicated some of Hopwood’s work using independent profit centres where budgets were more

technically suited and found little impact of style of budget use on job-related tension or on information

manipulation. He found that a budget-constrained style was related with meeting the budget and did not

result in the negative consequences found by Hopwood. Otley (1978) concluded that his results point toward

the need to develop a more contingent theory of budgetary control and subsequent studies examined the

impact of various contingent variables (Hirst, 1981; Imoisili, 1989; Govindarajan, 1984).

Criticisms of contingency theory

Contingency theory is logically appealing but has been subjected to much criticism on a number of fronts.

These criticisms, however, are generally based on certain aspects of the theory as embodied in studies rather

than with the idea of contingency theory itself (Hopwood, 1989). One of the main criticisms relates to the

methodology used in previous studies, as contingency studies have been mainly ‘ … large scale, cross-

sectional postal questionnaire-based’ (Chapman, 1997, p. 189). Chapman pointed out that these studies

sacrifice accuracy for generality but that many of the subsequent studies have failed to acknowledge this. He

suggested that a greater linkage is needed between qualitative and quantitative studies:

The results of qualitative studies can clearly be seen as providing the starting point of a large body of quantitative literature. But having gained their initial impetus, subsequent studies seemed content to refine existing models, and were at best hesitant to adapt their working assumption in the light of qualitative research on an ongoing basis (p. 203).

More in-depth, qualitative studies of contingency variables is therefore essential, given the rapid pace of

change in the environment. The definition of management control developed in the 1960s is based on large,

hierarchically structured organisations, which are now being replaced by other organisational forms in an

environment characterised by changes in the level of uncertainty and size, outsourcing of services, and

decline of manufacturing activities (Otley, 1994):

Adaptation to change will require the active involvement of many more people than had been traditional and the mechanisms for control of such activities will necessarily involve increased levels of self-control and group accountability (Otley, 1994, p. 292).

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Contingency studies have had a strong focus on manufacturing settings where tasks and organisation

structures have been more amenable to the successful use of accounting-based controls, and attention now

needs to be directed towards the use of accounting controls in other settings (Abernethy and Brownell,

1997). Using both a survey questionnaire and in-depth interviews, Abernethy and Brownell investigated the

research and development division of an organisation where accounting controls were less suitable because

there was less routine in the task. They used Perrow’s model to explain the relationship between technology

and controls, and found that accounting controls were less suitable where there were high numbers of

exceptions (non-routine items) in performing tasks. The control of time has been highlighted by Otley (1994)

as a key factor in the control of knowledge-based workers (and others), but one that has been almost totally

neglected in the control literature.

Other criticisms of contingency theory relate to piecemeal theoretical development (Briers and Hirst, 1990),

proliferation of antecedent variables (Fisher, 1995), and confusion over definition and measurement of

elements of the contingency model (Chenhall et al., 1981). Fisher (1995) maintained that the relationships

between general control mechanisms and formal control systems have not been explored thoroughly, and that

examining those relationships should provide a clearer understanding of how firms use control systems to

achieve organisational goals.

MANAGEMENT CONTROL IN AUDIT FIRMS

Audit firms are concerned with controlling the cost and quality of an audit. Regarding quality control, the

audit review has been shown to be an important form of quality control as it results in accountability pressure

(DeZoort and Lord, 1997). Auditors are accountable to their superior for the work they have performed and

will have to answer any queries on the work. Changes are taking place in the audit review procedure and the

‘ … emerging trend is the elimination of mandatory, multiple-layered, detail review’ (Rich et al., 1997, p.

88). Audit firms are moving away from a sequential, hierarchical, and iterative audit review to one involving

more verbal interaction (Bedard and Maroney, 1999; Rich et al., 1997). This suggests a move from the use of

the audit review as a diagnostic control to a more interactive one. Regular contact is now maintained

between the preparer and the reviewer, resulting in the audit review taking place on a real time basis (Rich et

al., 1997), often referred to as a review by interview (Bedard and Maroney, 1999). It has also been described

as a process that ‘ … encourages “building in quality” rather than “inspecting in quality” after the fact’

(Winograd et al., 2000, p. 180). This has been suggested to result in a greater ability to detect acts of

omission but a lower ability to detect acts of commission (Rich et al., 1997). The greatest difficulty in

controlling audit quality is the ambiguity of outputs resulting in uncertainty for auditors as to whether they

have conducted a ‘good’ audit (Power, 2003).

Regarding audit cost, control of time has been found to be the dominant form of cost control in audit firms

(Rhode, 1978) and evidence suggests that deviations from time budgets are used in a diagnostic manner to

control time (McNair, 1991). Empirical studies in audit firms have drawn on contingency theory to develop a

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better understanding of the suitability of time budgets in audit firms (Otley and Pierce, 1996a; Malone and

Roberts, 1996; Pierce and Sweeney, 2002). These studies were based on large samples and identified high

levels of dysfunctional behaviour in Big Four audit firms which were statistically associated with time

budget pressure. Other variables associated with dysfunctional behaviour have also been examined and

multivariate models have been constructed using multiple regression analysis (Pierce and Sweeney, 2002;

Malone and Roberts, 1996), but the explanatory power of these models has been low.

A feature of previous studies on dysfunctional behaviour in audit firms is the proliferation of variables

examined. These variables can be divided into four general categories as presented in table 1.

Table 1: Variables examined in prior studies of audit firms’ control systems

Variables examined Examples of previous studies Individual level variables (type A behaviour, need for approval, need for achievement, locus of control, self-esteem, ethical beliefs, organisational commitment, professional commitment, professional pride)

Malone and Roberts (1996) NcNair (1987)

Superior level variables (leadership style, supervisor approval of behaviour)

Otley and Pierce (1995) Kelley and Margheim (1990)

Control system variables (time pressure, participative target setting, budget emphasis, style of evaluation, quality control)

Alderman and Deitrick (1982) Otley and Pierce (1996a)

Contextual variables (size of the firm, grade of the auditor, accountant’s job function, audit area, firm culture, level of firm structure over procedures, perceived environmental uncertainty, risk of task, type of test, fixed fee v non fixed fee client, level of client influence over time budget, client issue of debt, size of client)

Malone and Roberts (1996) Kelley and Margheim (1987) Carcello, Hermanson and Huss (1996)

Many of the variables identified as antecedents to dysfunctional behaviour were first identified in studies in

the 1980s (Alderman and Deitrick, 1982; Kelley and Margheim, 1987). The audit environment has changed

considerably since then and little attention has been given to these changes in subsequent studies. Data

collection in the majority of studies was by means of a postal questionnaire (for example, Otley and Pierce,

1996a and 1996b) or experimental case approach (for example, Coram et al., 2000; Margheim and Pany,

1986). Opportunities to gain a richer understanding of the environment through other methods such as

interviews have been explored to only a very limited extent (Herrbach, 2002), reflecting the sensitivity of the

topic, which seriously limits opportunities for using face-to-face interviews.

The current study was designed to address this deficiency by conducting an in-depth qualitative investigation

of specified variables and the nature of their relationship with auditor QTB. Variables selected for the study

were those for which strong theoretical foundations exist in the management control literature and for which

prima facie evidence of an association with auditor QTB has been reported in prior, quantitative studies.

These variables are set out below.

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Time pressure

Most previous studies have equated time pressure with time budget attainability and conflicting evidence has

been found in previous studies on the type of relationship between time budget attainability and QTB. Kelley

and Margheim (1990) found evidence of an inverted U shaped one, though other studies reported evidence of

a positive linear relationship (Otley and Pierce, 1996b; Pierce and Sweeney, 2002). DeZoort and Lord (1997)

identified time deadline pressure as a form of time pressure and Pierce and Sweeney (2002) found both time

deadline pressure and time budget attainability to be significant variables in explaining QTB. Time deadline

pressure was operationalised as adequacy of time booking to job, pressure to work on another assignment

and client imposed deadline. Prior findings provide some insights into the complexity of time pressure but

characteristics other than level and type (deadline or budget) have not been previously addressed.

Participative target setting

Participative target setting has been given little attention in previous studies and where examined, it has been

simply expressed as participation in setting budgets (Otley and Pierce, 1996a; Pierce and Sweeney, 2002).

Conflicting findings have been reported regarding a possible relationship with QTB and no evidence was

found in support of a relationship between time budget attainability and budget participation (Pierce and

Sweeney, 2002), suggesting that even where auditors report that they participate in setting the budget they

have no real influence. The nature and impact of auditor participation in setting targets therefore warrants

further investigation.

Style of performance evaluation

Given that audit firms are labour intensive and audit quality is difficult to measure, pressure for performance

has been found to result from the use of time budgets to control audit cost (McNair, 1991). Previous studies

have found that ability to meet time budgets is a primary criterion for favourable performance evaluations in

audit firms (Kelley and Seiler, 1982) and that the majority of auditors are unable to meet their budgets

without engaging in some form of dysfunctional behaviour (Otley and Pierce, 1996a). Pierce and Sweeney

(2002) found that non-accounting style of evaluation and frequency of written evaluations were significant

variables in explaining QTB. Their findings revealed that the importance of meeting time budgets is now

balanced with other less objective criteria for performance evaluation such as effort put into the job. Style of

evaluation is an important factor in determining how this balance is portrayed to auditors and may impact

upon individual auditor behaviour.

Audit review process

The main control over quality is the audit review which in the case of the ‘review by interview’ approach

takes place during the audit (Rich et al., 1997). Conflicting findings have been reported on the impact of

quality controls on QTB. Otley and Pierce (1996a) reported that perception of the effectiveness of the audit

review was significantly related to QTB, but Malone and Roberts (1996) found that whether a firm had

explicit quality control standards which prohibit QTB was not significantly related to QTB. The changed

audit review process, involving a ‘review by interview’ may impact on the level of QTB and this has not

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been previously investigated. In light of previous contradictory findings and the revised audit review

approach, further examination of the relationship between the audit review and QTB is warranted.

Although previous studies have shown wide variations in terms of depth of investigation and conclusions

drawn, there has been a consistent focus on the specified variables and a possible association with QTB, as

depicted in figure 2.

Figure 2: Previous research on audit firm control system variables

OBJECTIVE AND METHODOLOGY

Objective

The study aims to conduct a qualitative investigation of the specified variables in Big Four audit firms for the

purpose of developing a deeper understanding of those variables and of their possible association with the

incidence of QTB by individual auditors. In terms of the contingency framework presented in figure 1, the

study therefore addresses specific control variables and investigates possible linkages with organisational

effectiveness (represented in this study by avoidance of QTB).

The study is focused on audit seniors, which has been identified as the most pressurised position in the audit

firm hierarchy (Kelley and Seiler, 1982). Almost all the previous research in an audit setting that formed the

background to the study was conducted in large firms and the current study was therefore carried out in Big

Four audit firms.

Qualitative approach

The study adopted a qualitative approach using 25 semi-structured interviews with auditors in their third and

fourth years of employment in four of the (then) Big 5 firms. Face-to-face interviews of approximately 50

minutes were conducted with each auditor in an off-site setting. As previous studies did not find inter-firm

differences between Big Five firms (Otley and Pierce, 1996a), the analysis of findings is at the level of the

Time budget pressure Inverted U (e.g. Kelley and Margheim, 1990) Linear (e.g. Otley and Pierce, 1996b) Time deadline pressure (e.g. Pierce and Sweeney, 2003)

Budgetary participation (e.g. Otley and Pierce, 1996a)

Style of formal evaluation (e.g. Pierce and Sweeney, 2002)

Audit review process (e.g. Malone and Roberts, 1996)

Quality threatening behaviour (QTB)

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individual and no comparison is made between firms. Qualitative approaches allow issues to be studied in

depth and detail without predetermining categories of responses, and ‘approaching fieldwork without being

constrained by predetermined categories of analysis contributes to the depth, openness, and detail of

qualitative inquiry’ (Patton, 1990, p. 13).

Approximately equal numbers of third and fourth year auditors were selected at random from staff listings

for interview, reflecting a relatively even gender balance. An effort was also made to ensure that auditors

from each of the main audit specialisms (manufacturing, financial services and small companies) were

selected. Appendix 1 sets out the characteristics of each of the interviewees selected. Permission was

obtained from the firms to contact by phone any auditors selected. The firms were not made aware of the

names of the individuals selected and each individual was guaranteed anonymity.

Semi-structured interviews using an interview guide were conducted. The guide was divided into a number

of sections, each section containing general questions and potential probes, and was based on examples of

interview guides in the literature (e.g. Lillis, 1999; Patton, 1990). The interview guide approach enables the

interviewer to have a list of areas for questioning but at the same time allows probing of questions in more

depth depending on the answers provided by the interviewee. Smith (1972) described this approach as ‘ … a

process in which the interviewer focuses her questions on some limited number of points. She may range

quite widely around a point, but this would be done only as a means of getting the required information on

that particular point’ (p. 119). The interview guide approach ‘ … helps minimise bias through the

prespecification of non-directive questions and probes’ (Lillis, 1999, p. 87) and the preconditioning reduces

the tendency to resort to unplanned, non-neutral probes during the interview (McCracken, 1988). Patton

recommended that ‘ … good questions should, at a minimum, be open-ended, neutral, singular, and clear’ (p.

295). These principles were used in the design of questions.

Before commencing, each interviewee was assured of the confidentiality of the study and their permission

obtained to record the interview. Because of the sensitivity of some of the interview questions, it was

emphasised that no other individual would have access to the tapes and that the anonymity of participants

would be fully respected. All interviewees gave permission to tape the interview and no interviewee asked

for the tape to be turned off at any stage. Throughout the interviews, the researcher found no evidence of the

questions being perceived as overly confrontational in any way and interviewees seemed relaxed and willing

to answer questions honestly.

While recognising that no one research method can be truly objective, it is important to document all the

steps taken to increase objectivity as far as possible and to be constantly alert for subjectivity at data

collection and analysis stages (Patton, 1990). Previous field research has been criticised for failing to attend

to such research criteria as validity and reliability (McKinnon, 1988). It is important in obtaining the trust of

readers to disclose fully decisions made in the design of a study and ‘ … at least part of the difficulty in

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publishing field research lies in convincing reviewers that the study is not only relevant and interesting, but

also trustworthy’ (Lillis, 1999, p. 80).

Several steps were taken to limit bias and increase objectivity both during the interview and in analysing the

interview data. Firstly, the interview guide was used to ensure consistent and complete coverage of all the

themes in each interview. Secondly, as well as taping the interviews, notes were also taken during the

interview to keep a record of important points that needed clarification or that appeared to conflict with other

points. Following each interview, notes were made by the researcher (as recommended by Patton) on such

issues as the level of rapport built up, interviewee’s reaction to questions, initial impressions, and any other

points about the context of the interview which the researcher considered should be noted. Thirdly,

transcripts of the first two interviews were reviewed by a colleague with particular emphasis on objectivity

and freedom from bias in questions. Fourthly, to limit bias in data analysis a structured analytical method

was used and this is described below.

Analysing the data

The importance of a disciplined approach to data analysis is well documented in the qualitative research

literature (for example, Patton, 1990; Miles and Huberman, 1994). Lillis suggested that ‘ … the credibility

and veracity of [any] work relies on the attention to the rigorous, complete and impartial analysis of the

available data’ (p. 81).

The first step in data analysis after transcribing the tapes and saving each of the transcripts in separate

Microsoft Word documents consisted of preparing contact summary sheets for each interview as

recommended by Miles and Huberman (1994). Brief answers to each of the questions on the interview

schedule were included in the contact summary sheets and the transcripts were then coded. This involved

importing the Word document containing the transcript into the software qualitative analysis package NUD-

IST (Non-numerical Unstructured Data – Indexing, Searching and Theorising) and assigning codes to each

sentence. As each interview was coded, codes were refined, which was a straightforward process using

NUD-IST, as any transcripts already coded were easily adjusted. Miles and Huberman suggested that ‘ …

those codes that survive the onslaught of several passes at the site, and several attempts to disqualify them,

will turn out to be the conceptual hooks on which the analyst hangs the meatiest parts of the analysis’ (p. 70).

An initial set of descriptive codes was created before the fieldwork as recommended by Patton (1990) and

these were refined as the interviews progressed. Following each interview, the interview was transcribed, a

contact summary sheet prepared, and the transcript coded before the next interview. This helped to ensure

that the researcher focused attention on key themes and learned from the previous interview.

In analysing the data, the researcher read fully through each of the coded transcripts three times.

Consideration was given to the appropriateness of the coding for each sentence and a report was then printed

on NUD-IST of all the sentences relevant to each code. Each of these sentences was reviewed to determine

the appropriateness of the coding. For presentation of findings, sentences which appeared to represent a

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particular code/theme were used to present the ‘thick description’ (Denzin, 1994, p. 505) in the findings

section. Patton suggested that ‘ … sufficient description and quotations should be included to allow the

reader to enter into the situation and thoughts of the people represented’ (p. 429-430).

Miles and Huberman (1994) recommended a number of ways of drawing and verifying conclusions, one of

which is pattern analysis. Pattern analysis commenced during data collection. Adding evidence to confirm a

pattern and being open to any evidence that disconfirms it, is important in forming conclusions as it helps to

protect against presenting unreliable evidence (Miles, 1979). Regarding the quality of the findings presented,

the researcher checked to ensure there were no contradictory statements made by the same interviewee and

that the evidence presented to back up each finding appeared to be reliable. Following the first draft of the

‘thick description’ prepared from the individual reports of each code, each of the transcripts was fully read

again to ensure that each of the quotations selected was considered in context and further revisions were

made in the presentation of findings.

Findings are presented in the next section, grouped under the specific variables examined in the study. The

number in brackets after each quotation refers to the interviewee number as set out in Appendix 1.

FINDINGS

Time pressure

Sources and causes of time pressure

Time budget attainability (as a source of time pressure) was the main focus of previous studies on

dysfunctional behaviour (e.g. Otley and Pierce 1996a). However, findings in this study suggest that auditors

are faced with a number of time targets and that time pressure can result from one or a combination of the

following: external time deadlines, internal time deadlines, and time budgets. There was general agreement

among auditors that overall, time pressure had increased in audit firms in the three years prior to the study.

The basic distinction in forms of time pressure was between pressure to have the work completed by a

certain date (deadline pressure) and pressure to control the number of hours charged to a job (budget

pressure). The distinction in forms of time pressure constitutes an important finding, given that most

previous studies of auditor time pressure concentrated entirely on budget pressure. Deadline pressure was

perceived by most interviewees to be more acute than budget pressure when audit firms are operating at full

capacity:

Budgets have never been the main goal … you only have two weeks to do this job so you have to get in and out, so it is more the deadline (15). Yes if you do blow your budget you will have to go and explain it, actually ironically it’s very rare that you blow your budget … you actually physically can’t because you don’t have enough hours to blow it (2).

The findings indicate that audit firms place reduced emphasis on budgets, and on some jobs budgets are not

even set, consistent with the current emphasis in the budgeting literature on a movement away from budgets

(Hope and Fraser, 1997; 1999). The evidence indicates that this decreased focus on budgets is due to the

15

booming economy and staff shortages which have resulted in a time deadline form of cost control, rather

than it being a change of policy by management on the use of time budgets:

They will try and restrict your hours but they understand that we are all working as hard as we can, so if we do go over we have no desire to work overtime. However, it seems to be inevitable at the moment given the amount of jobs versus the amount of staff and I think they know that (25).

The reduction in importance of meeting the budget may explain the positive attitude that many auditors now

have towards budgets:

It helps having a budget definitely because you have an idea, I mean it depends on how many jobs you have in-charged or if you have been on it before … but there are some jobs and there is no budget and it is quite difficult to know (14).

Many interviewees commented on the substantial increase in the volume of work compared to a much

smaller increase in the number of staff (an example was an increase of 27 per cent in the volume of business

over the previous three years compared to an increase of only 10 per cent in the level of staffing over the

same period). Audit firms are now operating at full capacity and resources are perceived to be stretched to

the limit as all staff work to extremely tight internal deadlines to complete their audit work. Further

increasing time pressure is high staff turnover and the recruitment of inexperienced staff. The improved

employment market has led to staff shortages and the increased time pressure resulting from staff shortages

has led to higher auditor turnover. This has become a vicious circle with further staff shortages and further

increases in turnover:

People are just tired and really annoyed … there is a strong atmosphere of you can only do it for three, three and a half years. You don't want to do it for any longer. You know it's not a [question of] people find[ing] auditing boring. It's … I don't really want to work every weekend of my life (2).

Increased time pressure has also arisen from a reduction in the quality and attitude of staff recruited, which

was believed to be a consequence of the improved job market:

The quality of staff they have taken in mightn't be as good as it should be purely because it is being driven by the market ... It is more difficult to recruit to as high a standard as it used to be and that's desperate measures… the attitude as well … of new staff they know they don't have to be there (15).

This reduction in quality of staff was perceived to lead to further time pressure for seniors as it takes longer

to explain the audit work to juniors, and also increased time pressure for juniors as they are slower doing

their work. The supply/demand of staff/audits was seen as mainly impacting on internal deadline pressure.

A source of external time deadline pressure which did not impact on the other time pressures was perceived

to result from international auditors imposing group reporting deadlines on local auditors.

One of two jobs that I have done recently, there were deadlines in relation to a foreign parent company by other auditors, ridicuously hard deadlines to be honest (1).

A further influence on the level of all forms of time pressure was perceived to emanate from the client as the

audit firm very often had to accept fee reductions, changes in timing of the audit, and lack of client

preparation, given the competitiveness of the current environment. The reluctance of clients to accept

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increases in audit fees was frequently compared to their acceptance of increases in taxation or consultancy

fees. The audit fee was also perceived to impact on even a manager’s ability to influence the time budget.

I suppose they [managers] are getting it from partners, if they can feed it up along the line and say here is a realistic budget, this is what the fee should be, go out and get that fee or else we don't do the job. That is realistically the way it should be done. Instead it comes down to here is the fee, here is the budget and work around that (5).

The level of client preparation for the audit was thought to depend on the timing of the audit and its

proximity to the year-end. Many interviewees accepted time pressure as a fact of life in business and

acknowledged that because clients are under time pressure themselves, they ‘ … don’t have time for

attending to questions from auditors so they are keen to have the jobs done quicker’ (3). Difficulty in

obtaining information from the client and the timing of receipt of information were perceived to lead to

additional time pressure.

Audit specific influences such as the complexity of the client’s business environment, the client’s computer

system, and size of the audit were also perceived to impact on the level of time pressure. The complexity of

the business environment and the sophistication of clients’ computer systems have increased considerably in

the last decade, with consequent implications for the time needed for audit work. The increasing complexity

of clients’ businesses was perceived to have increased the overall time needed for audit work. In some cases,

complexity was perceived to be related to particular industries as some industries such as financial services

were more complex, and that in the manufacturing area:

… they are putting in the long hours for about two months of the year and then that’s it, but in financial services it seems to keep going on and on (15).

Alleviating time pressure was improvements in clients’ systems as ‘the information that is available, if you

know how to ask for it and they [the client] know how to use it or use it to its best ability, can reduce the

amount of work you will have to do’ (4).

The size of the audit was considered significant in determining whether the audit team had to operate under

time budget pressure or time deadline pressure. For example, smaller audits with lower fees were controlled

more tightly by budgets than larger audits. This was perceived to be due to a greater need to make a profit on

the small audit as there is less potential for other profitable work.

Further increasing time pressure is the new risk-based audit approach which was introduced shortly before

the study and auditors were still on a learning curve at the time of the study. It was acknowledged that ‘…

down the line they feel the controls approach will yield savings in terms of budgets’ (10). In addition to these

factors, the increased volume of regulations and standards issued by the profession was thought to have

increased the risk of technical mistakes and increased the time needed on jobs:

The accounting standards aren’t getting any clearer so each time an accounting standard is brought in there is additional work that you didn’t have to do last year. So again that brings it back to the whole budgetary process. Is that built in? (19).

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In summary therefore, the findings suggest that time pressure arises from three sources: internal deadlines,

external deadlines, and budgets. The level of time pressure from any of these sources is perceived to be

influenced by a number of factors such as client induced pressure, audit specific characteristics (size of audit,

complexity of business environment, and client’s computer system), changes in the audit approach and

volume of regulations. These can be labelled antecedents to time pressure. In addition, staffing issues and the

volume of audit work are antecedents to internal deadlines and pressure from international auditors is an

antecedent to external deadlines.

Controllability of time pressure by firms

There were conflicting perceptions of the ability of firms to control time pressure and a wide range of

perceptions of the causes of that time pressure. Table 2 sets out the main types of time pressure and the

reasons why time pressure is perceived by auditors to be controllable or non-controllable.

Table 2: Controllability of time pressure by audit firms Type of time pressure

Reasons why perceived as controllable by audit firms

Reasons why perceived as non controllable by audit firms

External deadlines

Failure to negotiate more time with external parties Failure to refuse additional audit work

Client demands Other auditors’ demands

Internal deadlines

Reluctance to pay higher costs Failure to refuse additional audit work

Buoyant job market Recruitment of inexperienced staff

Budgets Partner greed Failure to obtain higher audit fees Desire for full recovery of costs

Market forces – lower audit fees and higher salaries

Some auditors were more willing to look at the position from the firm’s point of view and were more

sympathetic to the environment in which the firm had to operate but the majority came to the conclusion that

time pressure was generally within the control of the firm as there were ways in which the firm could

respond to changes in the environment:

I don’t think it has to be accepted … I know there are a lot of new jobs out there and a lot of new clients and a lot of work coming in but I think it is a matter of not taking on as much work (8)

Perceived impact of time pressure on behaviour

Previous studies have concentrated on the level of time pressure, usually by examining the impact of

perceived budget attainability on dysfunctional behaviour (Otley and Pierce, 1996a; Kelley and Margheim,

1990). Most studies have found a linear relationship between time budget attainability and QTB, though

Kelly and Margheim (1990) found evidence of an inverted U shaped relationship consistent with the

industrial psychology literature. Findings in this study suggest that other factors such as type of time

pressure, controllability of time pressure, and variability of time pressure moderate the relationship between

time pressure and behaviour.

There was no general agreement on which levels of time pressure result in functional/dysfunctional

behaviours, but in general, auditors believed that there was an optimal level of time pressure which had

positive effects. Positive effects included greater focus on completion of work, more effective dealings with

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clients, greater attention to relevant information, elimination of unnecessary work and better communication

with superiors:

It will motivate you when you have an achievable target, it will motivate you to work harder and work better. If you have a target and you say there is no way I am ever going to meet that, your work won't be as good even if you do get it eventually done on time. But again if you have weeks to do it it's not going to, there is a level in between (4).

The majority of auditors regarded the current level of time pressure as far higher than optimal, though a

minority of interviewees commented that it was around the optimal level. One auditor believed that what

would be perceived as an optimal level is psychological and that it would vary from person to person, while

others suggested a guideline of working no later than eight o’clock. One auditor expressed the view that,

given the low morale of staff at the present time in accounting firms, the only level of time pressure that

would be optimal was a nine to five day, which would not be considered reasonable by the firms.

In general as time pressure increased, it was perceived that there was a greater likelihood of a dysfunctional

response:

Well I suppose if somebody is under reasonable time pressure they will cope well and when it hits the pot obviously something is going to give. Obviously the work is not going to be to a very high standard but I would say that is going to be in very extreme cases (3). If you have an awful lot of jobs to do and you don't have sufficient time to do them, something is going to suffer … you end up just tying up the figures and you know, you don't get a chance to consider the big picture, the issues or environmental factors or anything like that (21).

The dysfunctional response was thought to occur at the end of the job by many auditors where time pressure

arose from client factors:

The client has given you some kind of reconciliation and you have been asking for the reconciliation for four weeks and you are doing something else and this is like your job that you have to finish up, it is looming over you all the time and he faxes you in a bit of paper, like there is something there and you know you should ask for more backup but you go - ah I will just put it on the file and reference it in, like the director or manager will have a query anyway and if they ask for the backup fair enough you will get the backup, but if you can get away with not doing the work (18).

Other consequences of increased levels of time pressure were perceived to be a lower level of training and

increased responsibility. In general it was felt that there is now less time for on the job training and increased

responsibility due to time pressure:

I don't think they [juniors] are being given the required training (this better be confidential)… and even at a senior level, I have been in there three years and this is my first year as a senior, and you are being given ridiculous stuff to do because it is being pushed all the way down. And managers are not doing their job so they are relying on you to basically manage the job yourself, and you know have a file ready to go to a partner review (15). In my second year, I would have noticed that I would have being doing work that a person a year above me would have done the year before. You are just literally moved up along the ladder (5).

Training courses were not generally seen as effective as ‘ … the tendency at these things is to see them

almost as a week’s holiday’ (11) because of the time pressure auditors are under for the rest of the year.

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Furthermore, interviewees claimed that training courses are often held during holiday periods and no effort is

made to ensure that the people who need training in a particular area are available. Reduced training and

increased specialisation were seen by auditors as restricting the learning experience during the training

contract. Inadvertent QTB due to lack of training and increased responsibility at junior level was referred to

by interviewees but it was believed that this would be detected by the senior. However, audit seniors

interviewed showed a reluctance to report this behaviour:

I know a number of instances where juniors were caught by my level [senior] and they might have been warned. People would be very hesitant to go straight away to a manager and say “you know they are signing-off tests and they haven't done anything”. I mean because it is such a big thing they mightn't realise just coming in new (21).

Regarding the existence of a linear or an inverted U-shaped relationship between time pressure and

dysfunctional behaviour, in this study different viewpoints were given on whether dysfunctional behaviour

would start to decrease once the time pressure reached a certain point. Most auditors maintained that time

pressure above a certain level resulted in low motivation to meet either the deadline or the budget:

If the time budget was totally unrealistic last year you are not going to even try to achieve it (7). Obviously then if work becomes unrealistic, it is obvious to see you might have a two week job and there is no way it will be done in three weeks in which case people will work a certain amount of overtime, but they are not going to kill themselves because they know it is totally unrealistic (5).

These comments suggest that at a certain level of time pressure, auditors stop trying to meet the time target

whether it is a budget or a deadline. This would support the existence of an inverted U-shaped relationship.

Given, however, the low level of morale and motivation that would be experienced at this point, auditors

may still reduce quality but for different reasons and thus the relationship would appear linear. Not all

interviewees agreed that auditors would stop trying to meet unrealistic time constraints, and a minority

suggested that even for unrealistic time deadlines:

It will just be a case of whoever is on the job will muck in and get it done. Obviously it may not be to the most perfect of audits but it will probably still be up to a high enough standard to pass file review (3).

A certain level of budget overrun was perceived to be acceptable but above that an auditor will have to

explain any overruns and therefore even for impossible to achieve budgets, an auditor would still be

motivated to reduce time. This supports the existence of a linear relationship between budget pressure and

dysfunctional behaviour.

There was no general agreement on what levels of time pressure are likely to result in QTB and moderating

factors such as type of time pressure, perceived controllability of time pressure and variability of time

pressure were thought to be important in determining its impact. Type of time pressure was considered

important in explaining the relationship between time pressure and dysfunctional behaviour as in general,

auditors found external deadlines tighter than internal targets or budgets and were more likely to cut corners

as a result of external deadlines, as these deadlines were perceived to be non-negotiable:

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If it is the case where the 16th of March you have to have whole loads of accounts sent off to the UK for a plc definitely you have to have that done come hell or high water. And where corners have to be cut they will be if you have to get the accounts off. So maybe quality will suffer if that is the case, if it is just an internal thing you know you can push them off (13).

A minority maintained that it made no difference whether the pressure was due to internal or external factors:

Pressure is pressure. It all leads to one thing, get things done quicker you know, no matter what way you look at it I think you will react the same way because it always comes back through the partner. Either the partner is telling you to hurry up or the client is telling the partner to tell you to hurry up, either way he will tell you and you are going to want to keep him happy (13).

Regarding budgets, one auditor believed that ‘ … budgets have bigger implications for quality than

deadlines’ (1) as partners and managers are more aware of the pressures from deadlines and take this into

account in the audit review, and also if the budget is tight, the manager will be reluctant to spend much time

on review as his/her charge-out rate is high. Though this represents the view of only one auditor it gives

insights into a perceived relationship between quality controls (audit review) and time pressure.

Regarding the perceived reason for time pressure, there was no general agreement on whether the

implications of time pressure differed depending on auditors’ perceptions of the controllability of time

pressure by audit firms. Some believed that time pressure perceived as uncontrollable by the firm had a more

positive effect on motivation and behaviour, as pressure from outside sources affected all levels and it was

not a ‘them and us’ scenario between management and staff:

I would think that morale would be affected more by internal pressure than by external. You know generally if people are working towards an external deadline, okay this is something that is outside of everyone's control and they would work to that ... Whereas internal pressure, I think people resent the fact that there wasn't more staff put on it ... If a manager is cutting budgets there might be a resentment that the manager might be caring more about the budget than about the staff (9).

Others maintained that time pressure emanating from the client made audit work easier as the client would

ensure complete information was available but for internal time pressure, the client would not necessarily be

as well prepared.

Regarding the effect of the level of variability of time pressure, two aspects were considered important in

moderating the relationship between time pressure and QTB. Firstly, a low level of uniformity between

auditors was perceived to lead to low morale:

If everybody isn’t as busy it has got a very bad effect, if you sort of see some people leaving at 5.30 … and then you have other people in until 10.30 and if you are the person in until 10.30 it is very demoralising (10).

Secondly, the constancy of the time pressure from one job to another could have adverse effects. In general,

interviewees believed that time pressure varied far less between jobs than when they commenced working in

the firms. Also, the busy season was seen to be continuous and year-long in the current environment:

I think that is probably the difference in the last few years is that it used to vary much more. There used to be maybe jobs that you would do for a month where you would have serious time pressure and then the next month you would be doing more relaxing jobs or at least you would be working

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normal hours, whereas now you are going from a really stressful job to another really stressful job to another really stressful job. So they don't have a time in between, and that creates a really bad atmosphere (2).

A minority of auditors thought that time pressure varied considerably between jobs. This was attributed to

several factors such as (1) client pressure, (2) the bargaining power of the manager in getting staff for the

job, (3) the employee grading system where auditors from the same intake can have different charge-out

rates depending on their educational background, and (4) the amount of time spent by the manager on

review. These represent perceived antecedent variables of time pressure, some of which were identified in

the previous section. Regarding the effect of the time spent by the manager on review:

You have a lot more time than you are budgeted for because you know the manager isn’t going to spend much time on the job. Say you have a £20,000 budget, fifteen of it is yours and five is the manager’s, if you know he is not going to use his five you can use more on yours (13).

Overall, the findings provide insights into the time pressure variable in three significant ways. Firstly, three

distinct forms of time pressure have been identified (external deadlines, internal deadlines and budgets) and

each of these are perceived to be associated with deliberate QTB. Secondly, perceived antecedents of time

pressure have been identified (client induced pressure, audit specific characteristics, changes in the audit

approach, volume of regulations, manager bargaining power, international auditors, supply of staff versus

volume of audit work, variation in charge-out rates, and time spent on review by manager). Some of these

are antecedents to particular forms of time pressure. The perceived controllability of time pressure and the

variability of time pressure between auditors and between jobs have been identified as moderators of the

relationship between time pressure and QTB. Finally, time pressure has been found to impact on the level of

training and responsibility which in turn impact on the level of inadvertent QTB (figure 3).

Figure 3: Relationship between time pressure and QTB

Antecedents to budgets Variation in charge-out rates Time spent on review by manager

Time pressure

Deliberate QTB

Moderators Perceived controllability by audit firms of time pressure Variability of time pressure (between auditors and between jobs)

External deadlines

Internal deadlines

Budgets Antecedents to external deadlines International auditors Antecedents to internal deadlines Supply-demand of staff/audits

Antecedents to all forms of time pressure Client induced pressure Audit specific characteristics Changes in the audit approach Volume of regulations Manager bargaining power

Training Responsibility

Inadvertent QTB

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Participation

Participation in setting both budgets and deadlines (internal and external) was examined and interviewees

considered the distinction between budgets and deadlines important in determining the degree of influence

possible over the setting of time targets. In general, both internal and external deadlines were perceived to be

impossible to influence by seniors as they were subject to such constraints as client pressure, pressure from

international auditors, low fees and staff shortages:

The trouble with it is if you are given too short a time for a job, they’ll listen to you and say “yea, yea we know it should take two weeks but you only have a week, and the reason you only have a week is because you are doing something else the following week” (2).

Regarding participation in setting budgets, the findings indicate that the level of audit senior participation

varies significantly between audit seniors even within the same audit firm. The following two respondents

were at the extremes in firm C:

The budget really seems to me to be set in stone and you are going to have to try to build your work around it (10). On some jobs I would set the budget … you would be looking at what sort of time-frame you need on the job and what sort of staff you have (7).

Antecedent variables

Interviewees were questioned on what they perceived to be antecedents of participation and what impact, if

any, they perceived participation has on individual auditor behaviour. The findings indicate that it is difficult

to implement participative budget-setting because the conditions suggested in the literature for successful

adoption of a participative approach are rarely present in the audit environment.

Information asymmetry between the manager and the senior where the senior has more information than the

manager only exists in very specific circumstances where, for example, the senior has worked on the audit in

previous years:

If you were a junior the year before and you are a senior the following year, and as a junior you knew you were under pressure the year before and it was a seven day job and this year it is a six day job so you might say “hang on here we were under pressure last year”, so it wouldn't be like we would be putting in the detail on the budget like this section should be another hour (3).

Where this is not the case, the manager is regarded as being in a better position to provide a more accurate

assessment of the time needed. Information asymmetry may also exist where a manager on a job has no

experience of a particular client. One auditor reasoned that he was given more influence in setting the time

this year because he was working for directors who were new in the firm and that it was not due to any

policy change on participation. Information sharing by the subordinate with the superior is rarely necessary

as the superior generally has more information than the subordinate. Auditors referred to situations where

they were involved in planning jobs that they were not going to work on because they were available at the

time when planning was taking place and that it was just a case of following managers’ instructions as to

what changes to put through from last year. Even though these auditors were involved in setting the time,

they had no influence, nor had they a stake in the budget-setting process as they were not assigned to these

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jobs. Where time is reduced from the previous year and the senior was not on the job before, the senior can

try to negotiate extra time if he/she knows the time charged the year before:

It is the senior’s responsibility to go to the manager and say “well they had this amount of time last year and this is what we will need this year, what is the difference, show me where there is less work” (9).

This amounts to forced participation and the senior is at a disadvantage in that he/she has no knowledge of

the accuracy of the time charged the previous year. The view was expressed that it would be a waste of time

telling the manager that the time recorded last year might not have been accurate if that manager was on the

job last year as:

If you have the same manager on a few years in a row he is going to know and if he knows then he is the one pushing it. So it is kind of a year on year thing, and you often find if the manager changes on a job then the budget changes as well (2).

Also, it was pointed out that the degree of uncertainty in the audit environment makes it difficult to predict

the amount of time needed on a job and the senior would not be in a position to reduce this uncertainty

before the job commences:

25 per cent of the time would be spent on stuff that was never even foreseen and it just came to light within the course of the audit (19).

The previous year’s senior was perceived to have a role in reducing information asymmetry and to be in a

position to influence the current year's time target by accurately recording time the year before. Setting a

budget often amounts to ‘ … just a case of looking at last year’s and adding on a bit or taking off a bit’ (3).

This view was expressed by many interviewees and typified by the following quote:

In a lot of the jobs you wouldn't have any influence, a manager just sets it and rolls it forward from previous years. I know one or two managers who would make a conscious effort of kind of saying “just record your time on the different sections you are working on, be realistic about it because it helps next year's audit”. That's the way it should be done but in most cases it is just roll it forward from last year (5).

Other auditors referred to ‘old school managers’ (21) who could plan their jobs in 10 minutes and saw

participation as a delay. These experienced managers, however, were seen as more approachable if there

were problems:

I generally find that more experienced managers would be more approachable, because I think new managers sometimes feel themselves under pressure and out of their depth, and they feel that if they have to get someone else for a week it is going to look bad on them, you know. They are a lot more lacking in confidence or you know not as used to the whole system (21).

Because of the particular characteristics of the audit environment (rotating audit team, high staff turnover

and nature of audit work) the opportunities for genuine participation by audit staff in preparing time targets

are limited and the degree of participation is generally perceived to be low.

Perceived impact of participation on behaviour

Participation was linked to improved motivation to meet the time target by some interviewees but it was

thought that this improved motivation could result in either functional or dysfunctional behaviour. By

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adopting a participative budget-setting approach, managers are ensuring that seniors take more responsibility

for the budget. On the dysfunctional side, it was thought that participation ‘could create pressure not to blow

the budget’ (7) because the senior would have been responsible for setting it. The management control

literature suggests that the use of budget participation in conditions where it is not suitable can result in

budgetary slack (Schiff and Lewin, 1970) or excessively tight budgets (Otley, 1978). Evidence in this study

suggests that participation could actually result in higher QTB if excessively tight budgets have been set to

impress a manager. On the functional side, however, participation was linked with more realistic time

pressure, which was considered a motivating factor in trying to meet targets:

I don’t think it is a case of - I have set the budget so that is a motivating factor. But indirectly if the time budget was totally unrealistic last year you are not going to even try to achieve it, whereas if this year you have an extra staff person on board then … it is a bit of a motivating factor (11).

In order for participation to result in improved motivation however, interviewees maintained that audit

seniors need to regard planning as equally important to other audit work, which was not perceived to be the

case at present. Auditors are perceived to be so overworked that if they are given time to plan a job ‘ … they

are going to take their foot off the gas and relax’ (9). Because of this, it was perceived that managers were

reluctant to assign auditors to planning. The attitude of the senior to planning is an additional antedecent to

participation.

Overall, the findings suggest that the opportunities for meaningful participation are limited but where it does

occur, participation is a moderating variable in the relationship between budget pressure and QTB and an

antecedent of budget pressure. Participation is irrelevant in the relationship between deadline pressure and

deliberate QTB as deadlines are due to other factors and cannot be influenced by participation. These

proposed relationships are shown in Figure 4.

Figure 4: Relationship between participation and QTB

Style of performance evaluation

Changes in performance evaluation system

There was evidence that a number of changes have taken place in audit firms’ performance evaluation

systems over the last three years. The formal element of performance evaluations is considered to be of less

importance than was previously the case, due mainly to staff shortages and the buoyant job market. For

Antecedents to participation Information asymmetry Senior experience of particular job Manager experience of particular job Attitude of senior to audit planning

Budgetary participation

Budget pressure

Deliberate QTB

Deadline pressure

25

promotion to manager, one auditor described the situation in audit firms as being ‘ … more sticking it out

and putting in your time kind of civil service type’ (8):

I think everyone has to keep everyone happy all the time otherwise they will just leave because they will be fed up. There are so many jobs out there, promotion is more if you are there you will get promoted at this stage (17).

Previous studies have referred to the ‘up or out’ promotion system in audit firms which results in strong

internal competition, particularly in periods of overstaffing (McNair, 1991). Findings in this study suggest

that in the current period of understaffing, promotion is more automatic for auditors who remain with the

firm and that the formal performance evaluations may not therefore have a major impact on individual

behaviour, due to their decreasing importance and ‘it’s [formal evaluation] a bit of an irrelevance really’ (5)

However, even though formal evaluations were not considered important, there was an importance attached

to informal evaluations and impressions formed at end-of-year discussions by management:

At the end of the year they all sit around and the managers discuss each person and it is more impressions at that stage, so if you are putting loads of hours into the manager’s job they are going to get the impression that you are not particularly good (10).

The informal evaluations were also considered important for obtaining employment outside the audit firm as

potential employers may contact managers within the firm for a verbal reference, and this would lead to

increased pressure for performance. Informal evaluations were considered more important than formal

evaluations:

A few words from a partner saying you are good is obviously more important than any 10 pieces of paper saying B, C, A [referring to grading system] (9).

The frequency with which formal evaluations are carried out varied between firms but usually there was a

requirement that evaluations be carried out after each audit. However, some auditors reported that they were

not always done due to seniors/managers leaving the firm and it was widely felt that it was not important to

put much effort into following up outstanding evaluations. Pierce and Sweeney (2002) found that auditors

who experienced more frequent formal evaluations reported significantly lower levels of QTB. One possible

explanation arising from these findings is that auditors who engage in QTB do not follow up outstanding

evaluations and hence report a lower frequency of evaluation.

A further significant finding relates to the styles of performance evaluation. Previous studies suggested that a

budget-constrained style of evaluation was predominantly used in audit firms (Kelley and Seiler, 1982). The

evidence indicates that this style of evaluation continues to be used for both formal and informal evaluations

but could be described as a target-constrained style in the context of the current audit environment as it

includes emphasis on both budgets and deadlines. Many auditors considered that this style would be used to

a greater extent where there was deadline pressure ‘ … as the client doesn’t know the quality of your audit

unless something serious happens’ (5) but will be aware if a deadline is missed:

You have to meet the deadline. There is no choice… like we broke one deadline this year and that was you know quite significant, talked about quite a lot (2).

26

I mean meeting the deadline definitely comes number one (16).

If they [audit juniors] only do one section, no matter how well it is done, you are in an absolute mess if they don’t cover all the areas … meeting the deadline is probably more important than the quality of what they do within reason (17).

Others perceived that this style is used even for budget-constrained assignments and that the audit file has to

be up to a standard necessary to pass the file review but that differences in quality or other criteria above

normal would not be rewarded if an auditor had charged too much time to the job:

It is quality but for the amount of time we spend. You won’t be rewarded if you have charged too much time (10).

The majority however perceived that ability to meet time budgets has decreased in importance for

performance evaluation as the deadline is now the main constraint. One auditor pointed out that because she

was on bigger audits, actual time was not even written in on the appraisals completed by her. Of course the

reason why an emphasis need not be placed on budgets for the bigger jobs may be that more time conscious

staff are assigned to them:

Well when I am filling out the appraisals I don't even write down the budgeted hours and the actual hours, now maybe that is because I am in a bigger group and on bigger jobs. I know on some jobs it is very important (14).

Where a target-constrained style was used, it was also perceived that the extent to which the auditor is to

blame for exceeding the time target was significant in determining implications for performance evaluation.

If you do miss a group deadline, it has happened on one this year and it was out of my control and like as long as you keep directors and managers aware of the pressures you are under it is not going to adversely affect you (23).

Other auditors perceived that it was difficult to separate ability to meet time targets from other evaluation

criteria such as quality and ‘ … if you are good you can get your job done within budget’ (1). This auditor

also referred to informal evaluations where ‘ … you get a good or bad name for quality but at the end of the

day that means budget’ (1). This suggests that in order to be considered a ‘good’ senior it is necessary to

perform quality work within the specified time and that it is difficult to separate one from the other:

At the end of the day the manager gets the roasting from the partner if they break the budget so inherently that means the manager is going to start looking for good seniors… That’s the [firm A] lingo … you are a strong senior or you are well… strong means you get the job done and you don’t break the budget but you get it done on time (1).

Even though these auditors perceived that ‘you can meet a deadline and produce a hash file but that would

come against you’ (15), it was still acknowledged that ‘if it was an external deadline you just don’t miss

those’ (15). This was supported by other interviewees and it was considered:

up to the manager to be satisfied about quality … the senior shouldn’t be worried about quality … for the larger jobs, probably meeting the deadline is most important (10).

27

Interviewees were questioned on what constituted ‘effort put into job’ as this for found by Pierce and

Sweeney (2002) to be the most important evaluation criterion. It was generally agreed that meeting a

deadline was the first signal of effort but that after meeting the deadline other criteria such as ability to

respond to audit review points, taking responsibility for sections and ‘being bothered about the standard of

work and not just carelessly ticking and bashing’ (5) were important.

Getting the job done in the time allocated is probably the top priority… but if the work isn’t of quality then you know issues will arise (8).

Interviewees referred to the relative ease with which a senior could evaluate a junior’s effort as they worked

in close contact with juniors, compared to the difficulty for a manager assessing a senior’s effort. It was

believed that the ‘review by interview’ approach is often used by managers to form an assessment of the

quality of the senior’s work.

Impact of style of evaluation on behaviour

The majority of auditors perceived that style of evaluation (mainly in the context of informal evaluations)

had an impact on audit behaviour. A target-oriented style of evaluation was perceived to increase the

likelihood of dysfunctional behaviour:

You don't really have anyone to turn to then [if a target oriented style is used]. You can't really say to the manager I am under time pressure because he will probably say “well that should only take an hour” (10). I think they [auditors] are less likely to lie about things or less likely to fudge things if they know they are not going to be - if there's going to be no recrimination for it (2).

More approachable managers who considered other factors in performance evaluation and adopted a more

profit-conscious style were thought to reduce the reluctance of audit staff to inform managers of any

problems and increase the likelihood of functional behaviour:

If the manager and partner portray that they are reasonable people, you will say more stuff to them and you won’t try and hide what you have or haven’t done (25).

This auditor believed that increased communication and an ‘ … air of yes you can talk, it is not a taboo

thing’ were very important in determining whether dysfunctional behaviour occurred. McNair (1991)

referred to the ‘undiscussable’ nature of cost-quality conflict at audit staff level. These findings suggest that

adopting a more communicative style should reduce dysfunctional behaviour. A minority viewpoint among

interviewees was that style of evaluation of the manager may have no impact on behaviour:

… that [impact on behaviour] would depend on the individual if they are conscientious or not, worried about it. They mightn’t bother. They might say well they are not going to sack me anyway, you are in contract and there are not that many people screaming to get in (3).

Overall, the findings suggest that a target-constrained style of evaluation is perceived to be associated with

higher levels of deliberate QTB and a profit-conscious style with lower levels of deliberate QTB. A target-

constrained style is perceived as the dominant style of evaluation. The buoyant employment market appears

to have resulted in a shift in importance from formal to informal evaluations. Evidence suggests that the

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formal applies (in theory at least) at the end of every job and there is no indication of inconsistency between

the formal and informal. Style of evaluation appears to be a moderating variable in the relationship between

time pressure and deliberate QTB (figure 5).

Figure 5: Relationship between style of evaluation and QTB

Audit review process

Changes in the audit review process

A major change in the audit review process has occurred, reflecting a flattening of the hierarchical reporting

structure. Many auditors referred to audits where juniors reported to managers rather than seniors, and audits

where seniors reported to partners rather than managers. A junior reporting directly to a manager was

thought to result in less ‘sheltering’ of juniors which was explained as follows:

It is much easier if you are new for someone who is two years ahead of you to sit down and say do this, this and this, and this is how you do it. So if that is coming from a manager it is much more intimidating … and also the manager isn't on the job all the time so you might get it once … and there might be things in it that you just purely don't know because you have never done it before which a senior would pick up on and get you to change. But that might not have happened (2).

The audit review process is now a ‘review by interview’ in all participating firms, which involves a face-to-

face meeting between the audit manager and the audit team. Previously, the audit review consisted of a

number of written review points which auditors dealt with after the review had taken place. The audit review

now takes place on a continuous basis during the audit and with electronic audit files, a manager can review

work-to-date at any point during the audit from any location. The review process is considered to be a check

on audit quality and auditors regarded ability to respond to audit review points, especially under this new

audit approach, a good measure of quality of work. Most auditors considered it to be the managers’ and

partners’ responsibility to ensure that the quality of the audit is sufficient, although many acknowledged that

there was no general agreement in the firm as to what was sufficient quality:

Some managers or partners are prepared to rely on their basically - nearly even gut [instinct] looking at the P and L and balance sheet because they were on top of things during the year and they would have regular contact with the client and maybe year end work isn't so important to them (9).

Reduced levels of documentation are now maintained on audit files, which links in with the change to

‘review by interview’ as there is less to review on the actual audit file. Opinions varied as to whether the

reduced level of documentation reduced the ability of a reviewer to re-perform work, though all auditors

agreed that work was rarely re-performed. Pierce and Sweeney (2002) found that perceived reasons for the

Antecedent Employment market

Time pressure

Deliberate QTB

Style of formal and informal evaluation

29

reduced documentation guidelines varied between audit partners and ex-auditors with audit partners

reporting that it was due to efforts to increase efficiency and ex-auditors reporting that it was due to an

increased consciousness of litigation.

Impact of audit review process on behaviour

Changes in the reporting structure and the level of documentation were considered to impact on the

effectiveness of the audit review and in turn on behaviour. Situations where seniors report directly to a

director or a partner and in effect have to manage the job themselves were seen to have implications for the

audit review:

I know myself from having a file reviewed by a director and having a file reviewed by a manager that the director will do in two hours what the manager would spend the whole day doing so obviously he is not looking at the detail nearly as much. And you know I am just wondering is there an issue there, that because one level is missing, it is not being reviewed in the same level of detail, and is the quality suffering there? But at the same time directors are going to stand back and look at … the big things … so they are probably looking at all the critical areas (18).

This change in the reporting structure was perceived to have implications for the level of inadvertent QTB as

juniors ‘ … will develop their own style of doing things much quicker’ (2). Decreased supervision of juniors

was linked to time pressure:

I suppose time pressure is one of the reasons why there is not adequate supervision … if you have lots to do, you don’t have time to supervise the junior properly and the junior could be doing anything (21).

It was also pointed out that sometimes juniors are not aware of the standard of work required when they

commence working in the firm and that not having a senior in the field to sit down and explain the work

could result in lower quality work:

It takes a while before they [juniors] know what’s okay and what’s not okay. So certainly in the beginning they will say “oh yea it’s fine”, but it’s only when you sit down and look at it that you can say “well that’s not okay because you are not supposed to do that”, whereas it will be a manager doing that to them which is much more intimidating (2).

The style of the manager in reviewing the work was thought to result in greater pressure on the auditor where

the manager was unable to cope with problems:

Well some managers if things are going wrong they feed it down the line and they just sort of get all upset and they can't handle it, you know so it is more pressure. They just kind of say it has to tie in and this kind of stuff … and then you have other managers who say “let’s just sit down and sort this out and see what is happening here”, you know can we do this an easier way like instead of just going in head strong and saying it has to be done this way and no other way will do (5).

One auditor gave an example of the impact on behaviour where a manager was perceived as unwilling to

accept explanations as to why something could not be done:

If you can't find a train ticket it is not your fault you know … Some managers would say that is fine, just note it, whereas other managers will say why and why couldn't you find it and you need to do this. And you know kind of making unrealistic demands, and I suppose in that case then people would be more likely to say ‘I agreed it’ (21).

30

The ability to re-perform work was mentioned by interviewees as being a way to increase the effectiveness

of the audit review:

The supposed standard [of documentation] is the re-performance standard, like writing agreed to invoice number one or agreed to bank statement and the date so there should be enough information. But if somebody is fudging, they might omit to mention certain details and they might have just [written] agreed it to invoice and bank (21).

It was considered that the reduction in level of documentation could also decrease a manager’s ability to

detect inadvertent QTB by auditors in the field.

In contrast to the perceived negative impact of reduced documentation and changes in the reporting structure,

many auditors believed that the new audit review approach is more likely to detect QTB and has therefore

reduced the likelihood of its occurrence. It was pointed out that it is ‘a lot easier to spot when somebody has

fudged something if the manager is coming out and asks you face-to-face “what did we do here” or “what is

this all about” and if you just sit there it is going to become fairly obvious’ (21). This was considered more

effective than the manager reviewing files in the office. Greater management involvement and on-site review

were considered important in ensuring all queries were followed up during the job and not left as outstanding

points after the job was completed. Quality was more likely to be reduced on ‘work for completion after the

fieldwork’ (18). When the perceived improvement in the ability of the new review approach to detect QTB

was probed further, interviewees admitted that it would be difficult for the review procedure to pick up

deliberate QTB:

I think again unless you are going to manufacture a whole working paper and I say I did all this but if it is something like review this or do this you might just say “oh we did that” so it is not going to be picked up internally (11).

Frequent reference was made to the difficulty of measuring audit quality. Many interviewees believed that

determining the acceptable risk also determines the required level of audit quality:

If nothing goes wrong therefore the accounts are right or perceived to be right and they are signed-off and they are published etc. etc., and okay you are under pressure to do it and maybe there are small mistakes in it, but I guess it is all part of risk management you decide that the risk is acceptable, it is hard to measure the quality. The quality of an audit is just to get it signed-off, get the figures right, how much value is added to it anyway (23).

Also, the effectiveness of the audit review procedure was perceived to vary considerably between managers

in terms of the amount of time devoted to review and the care with which the review is carried out. Given

that the ‘review by interview’ approach is less structured than the old review approach, the level of

variability is likely to be even greater:

Some managers don’t do a tap… you generally know the managers just knowing the depth they put into each job (13).

Overall, there is a perception that whereas the new audit review may result in more effective audit review in

some cases and it has greater potential to detect inadvertent QTB, in the event of deliberate QTB, detection is

less likely. The findings suggest the following relationship between the audit review process, its antecedents

and its impact on deliberate QTB. Regarding inadvertent QTB, the level of supervision is an intervening

31

variable in the relationship between time pressure and this form of behaviour. The audit review process does

not impact on the occurrence of inadvertent QTB.

Figure 6: Relationship between audit review process and QTB

DISCUSSION

The strengths and limitations of the study need to be pointed out in advance of any discussion of the

findings. Particular attention was paid to the pursuit of a rigorous and comprehensive approach to collection

and analysis of data, and the findings can therefore be viewed as having a high degree of validity (Patton,

1990). Secondly, the study achieved broad coverage, arising from the inclusion of auditors in their third and

fourth year of employment and from the participation of four of the (then) Big Five audit firms in Ireland.

Thirdly, the research has obtained in-depth data on a sensitive topic and is the first study to collect in-depth

interview data on the perceived impact of contingency variables on quality threatening behaviours. Power

(2003) referred to the difficulty of conducting fieldwork in auditing and in an analysis of a number of field

studies suggested that many of these studies were actually ‘research by stealth’ which had been conducted on

‘the margins of more orthodox work’ (p. 380) in order to legitimate the research. In carrying out this research

and in communications with the firms, the researchers did not disguise the topic of research or link it to

research on any other topic. The participating firms accepted the need for research in this area even though it

could be perceived as threatening for the audit.

Certain limitations arise from the use of a qualitative research approach, one of which is the small number of

interviewees and firms, which limits the generalisability of the findings. The research should therefore be

seen as an exploratory study that has inductively developed propositions of the relationship between control

system variables and QTB. Further research is necessary to examine the generalisability of the propositions

to the wider population of audit seniors, different time periods, other firms and different countries. Secondly,

the findings are based on perceptions of links between contingency variables and QTB rather than actual

incidences of QTB. A limitation of the interviews is that the absence of anonymity may have resulted in a

reluctance to confess to any personal experience of dysfunctional behaviour. At the same time, interviewees

were open in their responses and spoke freely about dysfunctional behaviour in general. Thirdly, this study

has only focused on the relationships between a limited set of contingency variables and specified

behaviours. Finally, an unavoidable limitation in qualitative research arises from the necessary judgement

Audit review process

Time pressure

Deliberate QTB

Antecedents Audit file

Level of documentation Ability to re-perform work

Review by interview Manager involvement Time on site

Ensuring queries followed up on site Reporting structure Manager style

Inadvertent QTB

Supervision

32

and subjectivity in the analysis of the findings. However, a number of steps detailed in the methodology

section were taken to limit bias and to ensure completeness, traceability and validity of the findings.

Audit Environment

The strengthened economic climate in Ireland has resulted in considerable growth in audit firms (the growth

rate for Big Five firms and the next largest firm in Ireland between 1999 and 2000 was 18% (O’Neill, 2000))

with consequent implications for the availability of suitably qualified staff. The findings suggest that under-

staffing and over-work are resulting in acute time pressure in the form of deadlines (DeZoort and Lord,

1997), and acute time pressure has been shown to be more harmful to an individual’s well-being than chronic

(time budget) pressure (Eden, 1982). It is clear that high levels of growth have resulted in unrelenting

pressure to meet time targets (mainly deadlines), a stretching of resources with over-utilisation of staff, high

numbers of new staff of lower calibre and lack of resources for training.

Overall model of relationships

Overall, the findings highlight the complexity of the relationship between deliberate and inadvertent QTB

and a number of control system and contingent variables. In addition, the findings have confirmed that the

selected variables which have been prominent in the management control literature are also perceived as

being important in an audit environment but appear to be much more complex than portrayed by previous

quantitative studies in this setting.

Time pressure was shown to emanate not from a single source as suggested previously, but a triad of sources,

the balance of which varies over time and is influenced by a range of factors. Staff shortages and the buoyant

economy have effectively provided a form of cost control as costs are naturally curtailed with the inability to

recruit staff. Previous studies reported conflicting findings on the type of relationship between time budget

pressure and QTB (Kelley and Margheim (1990) found an inverted U-shaped relationship, while Otley and

Pierce (1996b) found a linear relationship). Findings on the optimal level of time pressure in this study help

explain these inconsistent findings. In general, as time pressure increases the incentive to engage in QTB

increases. At a certain point, however, the time targets become too difficult to achieve and findings from

interviews suggest that this point depends on the moderating factors identified (the type of time pressure, the

variability of the time pressure (between individuals and jobs), the perceived reason for the time pressure,

level of participation, style of evaluation and audit review). As previous studies included only limited

consideration of these moderating variables, it is not surprising that conflicting results were found. Also, at

the point where targets are too difficult to attain, it would be expected that auditors would experience low

morale and may reduce quality for reasons other than meeting the target. The linear relationship between

time pressure and QTB may therefore continue beyond this point but is driven by different motivational

influences. The reasons for the behaviours at this level of pressure were not examined in previous studies.

Participation is heavily influenced by the source of pressure but there also seems to be a strong interaction

between the opportunity for participation and the reporting structures. Taking Shields and Shields’ (1998)

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antecedents for participative budgeting, both task and environmental uncertainties exist in the audit

environment but the audit senior is not in a position to reduce this uncertainty unless the senior has worked

on the job previously or the manager has limited experience of the job. In the audit environment, unexpected

events arise that cannot be predicted by managers or seniors and make accurate budget-setting difficult.

Managers are normally in a better position to deal with the possibility of unexpected events when setting

budgets than seniors. Interview findings suggest that the high staff turnover and staff shortages have further

reduced the ability of the audit senior to contribute to the planning process as seniors are less likely to have

worked on an audit in previous years. Also, external constraints such as audit fees and deadlines limit even

the ability of managers to influence time targets. To obtain the benefit of improved motivation and attitudes,

task and environmental uncertainty need to exist whereby the subordinate can experience self-respect and

feelings of equality from the opportunity to express his/her values. Inability to contribute to a reduction in

the uncertainties, combined with overwork and tiredness on the part of the audit senior, often result in

planning being viewed as an opportunity to relax. Although deadlines offer less scope for participation than

budgets, the move towards a risk-based approach to auditing and the change in audit review procedure to a

‘review by interview’ may offer greater opportunities for regular contact with the audit team and on-going

refinements to the audit programme. Audit management are becoming more closely involved in the audit on

a continuous basis and may therefore be better placed to more accurately assess audit team performance

during the audit. Evidence suggests that ability to meet time deadlines is the most important criterion but

after the deadline is met, other criteria then become important in assessing performance. This reduces the

emphasis on surrogate output measures, such as cost reports, and allows management to put greater emphasis

on broader dimensions of individual auditor performance. Changes in the audit review process and in the

audit methodology were recent changes at the time of the study and may not have been fully implememted

due to the serious staffing problem. The continuous involvement by management brought about by these

changes may facilitate a shifting of control emphasis from a hierarchical to a process team orientation (Otley,

1994), thereby encouraging more open discussion of time target difficulties.

The flatter structures seem to promote asymmetry by directing information towards the manager, who is

likely to develop more detailed knowledge of all audit areas and away from the senior who is less likely to be

exposed to areas covered by more junior staff. The shift in performance evaluation approaches is not only

related to the external economic conditions, but is also facilitated by more regular contact with staff at all

levels. Also, the flatter reporting arrangements reflect more of the elements of process control. This change

in the control system is discussed in the next section. Combining the models of the relationship between each

of the variables and both deliberate and inadvertent QTB results in an overall model as shown in Appendix 2.

This model is related back to Otley’s (1980) components of contingency theory in figure 1.

Control system

Using Simon’s (2000) categorisation of diagnostic and interactive control systems, audit firms appear to have

moved away from a diagnostic control emphasis to a system involving more interaction. The new approach

to audit review and the flatter reporting structure both facilitate a genuinely new approach to control which

34

includes strong elements of quality control, cost control and promotes a broader approach to performance

evaluation. Previously the audit review took place after the audit when all the fieldwork had been done and

costs incurred. The ‘review by interview’ may now form an interface between cost control and quality

control as it is conducted before all costs are incurred and the cost-benefit of additional work can be assessed

in advance. The ‘review by interview’ is intended to increase the level of interaction between the manager

and the audit team during the audit review. The flattened reporting structure may be an unplanned response

by the firms to staff shortages and time pressure or a planned strategic change by the firms. The changed

audit review procedure suggests that the flattened reporting structure may be part of this planned change.

Otley (1994) suggested that empowerment of lower level employees is necessary to cope with the rapid pace

of change and the level of uncertainty in the current business environment and findings on increased levels of

responsibility at lower levels suggest this has occurred in audit firms. Herrbach (2001) suggested firms

should consider abandoning the traditional ‘up or out’ philosophy as the new methodologies require more

quality personnel and firms should aim at achieving longer employment relations of 7 to 8 years. Findings

suggest in the current environment, the traditional ‘up or out’ strategy is now one of ‘out or up’ with

promotion ocurring more automatically for auditors who remain in the firm.

Though the new approach involving a ‘review by interview’ was seen as being more effective than the old

approach in controlling quality, the interview findings indicate that audit seniors believe the current approach

is of limited use in detecting deliberate quality reductions and that the effectiveness of the review varies

considerably between managers. The current economic climate which has resulted in understaffing, high

staff turnover, unrelenting time pressure at all levels and increased consciousness of litigation poses

particular challenges for the effectiveness of interactive controls. This is due to a perceived reduction in the

time devoted to review (particularly given the level of understaffing at the time of the study), less manager

and staff continuity on audits (given the high auditor turnover), elimination of multiple-layered review, and

reduced levels of documentation on audit files. Given the time pressure which seniors are under and the

changes in reporting structures, a major form of behavioural control (direct supervision by senior) is often

missing on audits, with junior staff reporting to the absent manager. Similarly, audit seniors claimed that they

often report to partners due to understaffing at manager level and in effect have to manage the job

themselves. While the manager would not have directly supervised seniors, he/she would have had greater

contact with the senior and would have provided more guidance. Increasing the potential of an adverse

impact on quality from the reduction in behavioural controls, is the increase in levels of responsibility

assigned to audit juniors and seniors. This increased responsibility would be expected to increase the need

for supervision and guidance at these levels. DeZoort and Lord (1997) referred to pressure that can result

from individuals being promoted too quickly as qualitative overload pressure. Simons (2000) suggested that

decreasing staff experience can result in increased possibility of inadvertent error. Inadvertent QTB by audit

juniors was highlighted in interviews by audit seniors who referred to situations where they detected QTB

which they assumed was inadvertent and would be reluctant to report it to the manager due to its seriousness.

Lack of training, increased responsibility and reduced supervision were perceived to be reasons for the

behaviour at junior level. The reluctance of audit seniors to report this behaviour to the manager is consistent

35

with the literature. Kaplan (1995) found that 25 per cent of audit seniors were either uncertain as to their

reporting tendencies or not likely to report a detected incident of QTB when the audit step was perceived as

unnecessary. Kaplan speculated that one possible reason for an audit senior’s reluctance to report incidences

of PSO may be a perception of an official penalty as overly harsh, particularly given the competitive

pressures and mixed signals faced by auditors. This lack of communication on a weakness in the training and

supervision of audit juniors which results in inadvertent QTB, prevents the firms from taking steps to reduce

the likelihood of QTB occurring. It would seem that the likelihood of detecting inadvertent QTB is reduced

when audit juniors report directly to the manager.

Otley (1994) suggested that increased use of informal controls is necessary in the new flatter organisational

structures. However, informal controls such as social controls are difficult to implement in the current

environment due to the high level of turnover and the recruitment of qualified seniors who have trained in

other firms and have missed the socialisation which occurs during the training contract. The limited

applicability of all these controls increases the importance of personnel controls. However, personnel

controls are only partially effective as firms are operating at full capacity and are finding it difficult to attract

suitable staff, resulting in the recruitment of staff who may previously have been rejected at selection stage.

Also, training courses are overly time consuming, given the constancy of time pressure. Interview evidence

suggests that a lack of training results in psychological contract violation, which is defined in the

organisational theory literature as the belief that employees have that the terms of their contract have not

been fulfilled (Morrison and Robinson, 1997). Interviewees believed that audit firms are not fulfilling their

obligations to provide adequate training and experience in different areas. Breach of psychological contract

has been associated elsewhere with decreased employee trust in employers, decreased job satisfaction, and

increased turnover (Robinson and Morrison, 1995; Robinson and Rousseau, 1994).

Implications of findings for management control literature and audit firms

Calls have been made in the management control literature for more in-depth studies of control issues

particularly for examining how variables operate in combination (Chenhall, 2003) and this research re-

affirms the potential contribution of these studies. The findings emphasise the importance of studying control

in an environment where key conditions are breached. In addition, the difficulties of moving from a

diagnostic control system to a more interactive one are highlighted when an organisation is operating in a

booming economy with high levels of understaffing.

The management control literature identifies the importance of the level of target difficulty in determining

performance. It suggests that an optimal level of target difficulty exists which results in the highest

performance, and that the relationship between target difficulty and performance is an inverted U-shaped

one. This study has contributed to the literature by identifying certain factors which moderate the

relationship between time pressure and QTB. The findings suggest that these factors combined provide a

better indicator of behavioural responses to time targets than the level of target difficulty alone and that

36

previous studies examining the existence of an inverted U-shaped curve have over-simplified the

relationship.

Regarding participation, the findings show that only rarely are the antecedents of participative budgeting, as

suggested in the literature, present in the audit environment. Opportunities for genuine participation in audit

firms are limited due to the particular characteristics of the audit environment. Previous studies suggested

that increased participation should reduce dysfunctional behaviour (Otley and Pierce, 1996a). These findings

demonstrate the importance of examining the suitability of the environment for participation before

conclusions are drawn regarding the outcomes of participation.

From the audit firm perspective, this study identified relationships between control system variables and both

deliberate and inadvertent QTB which have practical implications for the firms. Time pressure has increased

considerably and appears to be directly related to both deliberate and inadvertent QTB. To reduce the level

of QTB, audit firms need to target either the level of time pressure or one of the moderating variables.

Regarding deliberate QTB, firms need to be conscious of the increased visibility of deadlines compared to

budgets. The fact that deadlines are precise, public and visible seems to add to the pressure to avoid breaking

them and the temptation to compromise quality, which is much less public and precise. Although many

deadlines arise from external constraints such as client pressure, audit firms need to ensure that they have

satisfactory coping mechanisms in place to control these pressures. Regarding inadvertent QTB, this

behaviour appears also to have arisen from time pressure which has resulted in less on-the-job training,

increased responsibility and lower levels of supervision. Firms can reduce this behaviour by ensuring that

appropriate levels of responsibility are assigned to auditors and that adequate systems of training and

supervision are in place.

CONCLUSION AND FUTURE RESEARCH

Overall, from the perspective of relatively junior staff, the findings suggest that the changes in the control

system in audit firms do not match the changed audit environment. The changes in reporting structures and

audit review approach highlight a move to more interactive type controls by firms. However, high staff

turnover and severe staff shortages appear to have reduced the effectiveness of these controls. Otley (1994)

suggested that organisations need to concentrate on informal controls, given the changed organisational

structures necessary to respond to changes in the environment. Future research is needed to examine the use

of informal and interactive controls in audit firms.

Given the prevalence of time deadline pressure highlighted in this study, greater consideration needs to be

given in future studies to investigating the effects of this pressure. Power (2003) suggested that working long

hours has an important social function for auditors as it is important that auditors are seen to work hard.

Future research is needed on the attitudes of audit partners to time pressure and on the extent to which time

pressure is seen as a desirable part of an auditor’s work. Time deadlines are also a source of pressure at

manager and partner level and as the audit review process is less structured and more dependent on manager

37

involvement and time on site, a dysfunctional response to time pressure at manager level may be to reduce

their input to the audit review. Findings suggest considerable variation in audit review style between

managers. Miller (1992) pointed out that there is an incentive for individual partners to engage in self-

serving behaviour at the expense of the overall partnership. There is a need for future research to examine the

impact of pressure at higher levels in the organisation.

Regarding the influence of the client, no previously published research has analysed the client’s views on the

quality of the audit, their awareness of time budget pressure, and their awareness of the extent to which audit

teams engage in game playing. Findings in this study suggest that audit clients may be able to manipulate

auditors into engaging in dysfunctional behaviour by delaying giving documentation to auditors. In addition,

the ability of the client to pressurise the firm into reducing both the audit fee and the time taken to do the

audit appears to have increased.

This study concentrated on control system variables and was not intended to be exhaustive in identifying

variables which impact on responses to the control system. There is a need for more in-depth studies of this

complex area of research and future research needs to be conducted in a sufficiently open manner to detect

other possible variables which impact on responses. Findings from in-depth interviews have contributed to a

much deeper understanding of the issues than had been obtained from previous quantitative studies. The

greatest challenge is likely to be access and it is important for accounting academics to build and maintain

strong links with audit firms to continue research in this fruitful area.

Footnotes 1 A review of auditing papers published in the 1992 and 1993 issues of five top journals showed that only one paper was based on field research.

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APPENDIX 1: Summary of interviews

Interview

number

Firm Years’

experience

Gender Audit area

1 A 3 Male Other

2 A 2 Female Manufacturing

3 B 2 Male Manufacturing

4 A 2 Female Manufacturing

5 B 3 Male Financial services

6 B 3 Female Manufacturing

7 C 3 Male Manufacturing and financial services

8 C 2 Female Manufacturing and financial services

9 B 2 Male Financial services

10 C 2 Male Manufacturing

11 A 2 Male Manufacturing

12 B 3 Female Financial services

13 D 3 Male Manufacturing

14 B 2 Female Manufacturing

15 A 2 Female Financial services

16 D 2 Male Manufacturing

17 D 3 Female Manufacturing

18 A 3 Female Other

19 B 3 Male Manufacturing and financial services

20 A 3 Male Financial services

21 B 2 Female Financial services

22 D 2 Female Manufacturing

23 A 3 Male Other

24 C 3 Female Manufacturing

25 C 3 Female Manufacturing

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Appendix 2: Overall model of relationships between control system variables and QTB

Moderators

Other Moderators Perceived controllability by audit firms of time pressure Variability of time pressure (between auditors and between jobs)

Participation

Style of formal and informal evaluation

Audit review process

Information asymmetry (manager and senior experience of particular job), Attitude of senior to audit planning

Employment market

Audit file ( level of documentation and ability to reperform work), Review by interview (manager involvement, time on-site, ensuring all queries followed up on site), Reporting structure (manager style)

Antecedents to Moderators

Antecedents to budgets Variation in charge-out rates Time spent on review by manager Participation

Time pressure

Deliberate QTB

External deadlines

Internal deadlines

Budgets

Antecedents to external deadlines International auditors Antecedents to internal deadlines Supply-demand of staff/audits

Antecedents to all forms of time pressure Client induced pressure, Audit specific characteristics, Changes in the audit approach, Volume of regulations, Manager bargaining power

CONTROL SYSTEM

CONTINGENT VARIABLES ORGANISATIONAL EFFECTIVENESS

Training Responsibility Supervision

Inadvertent QTB