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THE IMPACT OF CLIENT INTIMIDATION ON AUDITOR INDEPENDENCE
IN AN AUDIT CONFLICT SITUATION
Damai Nasution*
* Corresponding author; email: [email protected]
, Ralf Östermark
School of Business & Economics
Åbo Akademi University
Finland
A DRAFT VERSION 18 OCTOBER 2012
Please Do Not Quote without Permission
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Abstract
An audit conflict situation is argued may impair auditor independence; especially when a client exerts
pressures to an auditor in order to get favored results. Client pressures can manifest into several
forms, one of these is intimidation in which a client threatens to replace the auditor if the auditor
does not tend to the client’s position. This study aims to investigate the impact of client intimidation
on auditor independence in an audit conflict situation. It also attempts to investigate the impact of
auditor’s perceived pressure on auditor independence. Finally, this study also explores the
moderating roles of auditor’s professional commitment dimensions in the relationship between
auditor’s perceived pressure and auditor independence.
An instrument based case was administered to 119 auditors from mid-sized auditing firms in
Indonesia. The subjects were divided into two groups with the presence or absence of client
intimidation in an audit conflict situation. Auditor independence is measured through the net
equipment balance signed-off by auditors for equipment in question. The higher the net equipment
balanced signed by the auditor, the more likely the auditor compromised independence. ANOVA and
regression analyses were used to test the study’s hypotheses.
The results show that: (i) auditors who experience client intimidation in the audit conflict
situation will more likely to compromise independence than those who are in a similar situation but
do not experience the intimidation; (ii) auditors who experience the client intimidation perceive
higher pressure than those who do not experience it; (iii) auditors’ affective and continuance
professional commitment dimensions moderate the relationship between auditor’s perceived
pressure and auditor independence. The results indicate that the negative impact of client
intimidation on auditor independence; however, high auditors’ professional commitment can
hamper that negative impact.
Keywords: Auditing, auditor independence, audit conflict, client intimidation, perceived pressure,
professional commitment
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INTRODUCTION
The public and regulators have expressed concerns regarding auditor independence for a long time.
However, these concerns culminated after a series of corporate failures that failed to be faulted by
auditors and restatements to audited accounts, e.g. the HIH Insurance (March, 2001) and One.Tel
(July, 2001) in Australia; Enron (October, 2001) and WorldCom (June, 2002) in the U.S.; Vivendi (July
2002) in France; Ahold (February, 2003) in the Netherlands; Parmalat (February, 2003) in Italy; and
Kanebo (2006) and Olympus (2011) in Japan. These corporate failures caused public to doubt the
independence of auditors and raise serious concerns to auditors’ ability to resist client management
pressures, especially in an audit conflict situation, and the overall value of auditing (Lin and Frazer,
2008; Ye, Carson, and Roger, 2011). The public places trust to auditor to conduct their duty in
independent ways. By benign the independence, auditor could increase the reliability and credibility
of financial statements. Thereby, the public can rely to the audited financial statements as a basis for
their decision; especially investment and loan decisions. Meanwhile, regulators concerns to auditor
independence are more likely to avoid any shock to the stability of capital markets caused by audit
failures.
An audit conflict situation is one of situations that may impair auditor independence. Accordingly,
Knapp (1985) stated that audit conflict is potentially a serious threat to auditor independence. It is a
situation in which there is disagreement between an auditor and a client over some accounting
issues. In the presence of audit conflict, the auditor commonly is in a weak position when dealing
with the client because of an imbalance of power between the auditor and the client; hence the
auditor is tending to be lenient to the client’s position. Moreover, the client, in order to get favored
results, can also exert pressures on the auditor. These pressures can be materialized into threats; one
of them is intimidation threat. The international Federation of Accountants (IFAC, 2012) also
categorizes this threat as one of five threats to auditor independence. Intimidation threat occurs
when a member of an auditing team may be deterred from acting objectively and exercising
professional skepticism by threats, actual or perceived from directors, officers or employees of an
audit client (IFAC, 2012). Accordingly, Bennett and Hatfield (2012) stated that client management
may use explicit or implicit intimidation tactics on auditors in order to achieve their goal. In the
survey that Bannet and Hatfield conducted, they found that auditors, especially staff-level auditors
often experience intimidation by audit clients. A common form of intimidation threat is the threat of
replacement of an auditor. For instance, as the Olympus scandal revealed in 2011, it also revealed
that Olympus replaced its auditor in 2009 as an outcome of a disagreement over accounting issues
(Layne and Ridley, 2011). In addition, Cheung and Hay (2004) found that shareholders believe that
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intimidation threat affects auditor independence. Astonishingly, according to Fearnley, Beattie, and
Richard (2005), intimidation threat is the threat that has the least prohibition and safeguards in the
auditor independence frameworks.
Prior studies have examined the impact of audit conflict on auditor independence and found
important evidences. Yet, to our knowledge, there are no studies that directly examine the impact of
client pressures in the form of explicit client intimidation to replace the auditor on auditor
independence in an audit conflict situation. The lack of literature is motivating this study. Moreover,
DeZoort and Lord (1997) develop a pressures model described several variables that may affect how
auditors will behave in the presence of pressures. Hence, based on that model, this study includes
auditor’s perceived pressure and auditor’s professional commitment that might affect and moderate
auditor independence in the presence of client intimidation. Moreover, the present study advances
upon prior studies by using a multidimensional measure of professional commitment. Auditor
independence is measured through the value of the net equipment balance signed-off by the
auditor. The higher the net equipment balance signed-off by the auditor indicates the more likely the
auditor will compromise independence.
This study contributes to existing auditing literature in several ways. First, this study examines the
impact of explicit client intimidation on auditor independence in an audit conflict situation. Second,
this study provides empirical evidence of a pressure model that was developed by DeZoort and Lord
(1997) in two respects, by examining:
1. The impact of auditor’s perceived pressure in the presence of client intimidation on auditor
independence,
2. The moderating role of auditor’s multidimensional professional commitment on the relation
between auditor’s perceived pressure and auditor independence in the presence of client
intimidation.
Overall, the study contributes to our understanding of how explicit client intimidation may
deteriorate auditor independence and affect auditor’s perceived pressure. It also contributes to our
understanding about the moderating role of each auditor’s professional commitment on auditor
independence.
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THEORETICAL FRAMEWORK AND HYPOTHESES DEVELOPMENT
Audit Conflict and Client Intimidation
Independence is the most valuable asset of the auditing profession and has been discussed by
practitioners and academics for a long time. However, until nowadays the definition of auditor
independence is still inconclusive. According to prior studies, there are several definitions of auditor
independence. For example, Knapp (1985) define independence as “an auditor’s ability to resist
client pressure.” McKinley, Pany, and Reckners (1985) define independence as “the auditors’ ability
to act with integrity and objectivity.” Bartlett (1993) defines independence as “an unbiased mental
attitude in making decision about audit work and financial reporting.” Additionally, Nouri and
Lombardi (2009) define independence as “freedom from the control of those whose records are
being reviewed”.
From the perspective of aforementioned definitions indicate that there are some challenges that
may affect auditor independence. One of these is an audit conflict situation that occurs in the
auditing assignment between an auditor and a client. Audit conflict between the auditor and the
client usually emerges when there is a disagreement between the auditors and the client over some
accounting issues, including the need to make adjustments to the financial statements, the
appropriate of client’s applied accounting principles, or the adequacy of financial statements
disclosure (Knapp, 1985). The audit conflict situation has urged the interest of both regulators and
researchers because it is potentially a serious threat to auditor independence (Knapp, 1985).
Moreover, an audit conflict situation that occurs in the auditing process should be resolved before
the auditor can provide an opinion on the financial statements.
Goldman and Barlev (1974) argue that in an audit conflict situation, a client has a strong incentive
and power to get more favorable audited financial statements. This incentive aligns with
shareholders’ interests: both, although based on different motives, want the audited financial
statements to provide a good impression on third party. The good impression would assure potential
investors to invest in the firm as well as creditors to grant the loans. In the presence of audit conflict,
Auditors are commonly in a weak position because of an asymmetrical power relationship between
the auditor and the client in which the client selects the auditors, determine scope of auditing, and
terminate or replace auditors. The client also provides the auditor with the facilities and information
needed to perform the audit work; even when the auditor is selected by audit committee, there are
no specific enforcement mechanisms ensure that the client does not become involved, directly or
indirectly, in selecting the auditor or determining the audit fee and the scope of the audit (Windsor,
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2005; Baker, 2005). Consequently, the auditor tends to favor to the client’s position (Kadaous,
Kennedy, and Peecher, 2003; Moore et al., 2006).
Furthermore, besides the asymmetrical power relationship between the auditor and the client, the
client may also exert pressures on the auditor in order to assure favored results. Accordingly, prior
studies reveal that there are at least two pressures that faced by auditors and can deteriorate
auditor independence (Knapp, 1985; Gul, 1991; Tsui and Gul, 1996; Lord and DeZoort, 2001; Lin and
Fraser, 2008; Nasution and Östermark, 2012). The first is pressures within the auditing firm, named
social influence pressures, consisting of obedience pressure that exerted by managers or partners
and conformity pressure that exerted by peers. The second is pressures exerted by a client. Lee
(1995) stresses the public doubt regarding the ability of an auditor to resist client pressures to
misreport. In addition, Lord (1992) states that even though auditors face several forms of pressures
in the audit assignment, research into auditor decisions or judgments has seldom incorporated these
pressures into their research design.
Pressures from a client can be directly or indirectly, explicitly or implicitly exerted by the client, and
can also manifest into several forms (Lord, 1992). Accordingly, Knapp (1985) examine how certain
contextual factors will affect of the audited financial statements users’ perception on auditor
independence. The contextual factors are: the nature of conflict issues, the client’s financial
condition, the provision of client management accounting system (hereafter MAS), and the degree of
competition in the external audit market. The findings supports that the contextual factors in
auditor-client conflicts affect users’ perception on auditor independence.
In line with Knapp’s study, Gul (1988) examines bankers’ perception on contextual factors that will
affect auditor independence. The contextual factors consist of audit committee, client’s financial
condition, provision of MAS, level of competition in the external audit market, and audit-firm size.
Using experimental method, this study finds that MAS, level of competition, and audit-firm size are
perceived to affect auditor independence. Furthermore, extending his prior study, Gul (1991)
examines the effect of audit fee size, MAS, audit firm size, and competition on audit independence.
Subjects, forty-nine bankers, were asked to make a subjective judgment regarding auditor
independence in the case of materially unrecorded liabilities. The results support the hypotheses
that audit fee size, MAS, audit firm size, and competition affect bankers’ perception of auditor
independence. Both Knapp (1985) and Gul (1988, 1991) focus only to the perception of financial
statements users and not to auditors directly. Felix et al. (2005) argue that focusing to users of
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audited financial statements rather than on auditors might be due of difficulty in creating realistic
pressures or intimidation treatments in an experimental setting.
However, some further studies have tried to improve Knapp and Gul Studies through focusing on
auditors and treating pressure in their research designs. Felix, Gramling, and Maletta (2005) study
the influence of client pressure on auditor independence in term of auditor’s decisions to rely on
internal audit. They measure client pressure through auditors’ assessment on how intensively their
clients encourage them to use internal audit work. A survey was conducted to collect the data. The
finding shows that auditors appear to be less concerned with internal audit quality and coordination
in making internal audit reliance decisions when they face more intensive client pressure.
Hatfield, Jackson, and Vandervelde (2011) investigate auditor independence in term of auditor’s
proposed audit adjustment in the presence of a client pressure. A client pressure was materialized
into two components: client importance and client opposition to adopt the adjustment. They believe
that these two components together will create a strong manipulated treatment of the client
pressure. Using 149 auditors’ responses, they find that client pressure significantly affects auditor
independence. It indicates that auditors who face client pressure will propose audit adjustment to a
lower amount than those who do not face the client pressure.
Besides asymmetrical power relationship between the auditor and the client and also the possible
pressures exerted by the client, auditor independence may be impaired through an incitement to
ensure and retain consecutive audit assignments from the client. Chang and Hwang (2003) show
retention motivation or incentive will affect auditor independence; at the same time, the auditor will
also consider the client’s business risks. In addition, Blay (2005) argues that the fear of losing the
client will let auditors to compromise their independence. Moreover, Goodwin and Trotman (1995)
show that auditors will compromise their independence when the risk of losing the client is high. And
indeed, their study reveals that when the risk of losing the client is high then it appears to dominate
the risk of litigation. This means that auditors will weigh the risk of losing the client more than the
risk of litigations that may arise from audit failures.
Taken together, the literature suggests that when audit conflict occurs between the client and the
auditor, commonly, the auditor is in a weak position, especially in the presence of client pressures.
This is because of an asymmetrical power relationship between them. It also shows that the risk of
losing the client or reward for retaining the client will induce auditor’s consideration to favor the
client’s position. Indeed, the risk of losing the client will dominate other risks that possibly exist.
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Moreover, pressures from the client can be manifested into a variety of forms; one of them is
intimidation threat. Intimidation threat is one of independence threats in the auditor independence
frameworks (e.g. IFAC, 2012) as well. There are no studies that directly and explicitly examine the
influence of intimidation threat on auditor independence. Intimidation threat erupts when a member
of auditing team may be deterred from acting objectively and exercising professional skepticism by
threats, actual or perceived from directors, officers or employees of an audit client (IFAC, 2012).
Regarding intimidation threat, Bennett and Hatfield (2012) state that clients may use explicit or
implicit intimidation tactics on auditors. Their survey also reveals that auditors, especially staff level
auditors, often experience this condition. Cheung and Hay (2004) find that shareholders believe that
intimidation threat affects auditor independence. Astonishingly, according to Fearnley, Beattie, and
Richard (2005), intimidation threat is the threat that has the least prohibition and safeguards in the
auditor independence frameworks. In addition, a common form of intimidation threat is the threat of
replacement of an auditor (IFAC, 2012). The present study argues that when the auditor experience
an audit conflict situation that is accompanied by client intimidation to replace the auditor then the
auditor will compromise their independence in order to avoid of losing the client; regardless of any
contingency factors. The level of compromise differs when auditors only experience auditor conflict
without any client intimidation. In the present study, auditor independence is measured in a
monetary response, in term of the auditor signs-off on the net equipment account balance for the
equipment in question. The higher the net equipment balance signed-off by the auditor, the more
likely the auditor will compromise independence. Based on the argument above, the first hypothesis
is stated as follows:
H1
: Auditors in an audit conflict situation that is accompanied by client intimidation will sign-off
higher on the net equipment account balance for the equipment in question than those who
experience a similar situation but without client intimidation.
Perceived Pressure
DeZoort and Lord (1997) generate a general model of pressure in the accounting and auditing field.
The model focuses on professional pressures that can be applied to a specific accounting situation
and potentially tested in an experimental setting. DeZoort and Lord develop this model grounded on
a general pressure model in the organizational stress literature.
There are three important constructs in this model. The first is job pressures (x), defined as an
objective stimulus constructs referring to individual characteristics or a combination of
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characteristics and events that impose on the perceptual and cognitive processes of individual. The
second is a stress response (y), defined as how auditors perceive individual pressures at a specific
point in time as well as a cumulative effects of pressure over time . The last is strain outcomes,
defined as the behavioral or attitudinal consequences related to pressures stimuli (x) and stress
response (y). In the behavioral consequences, pressures that are experienced by auditors may affect
their judgment and decision.
Based on this model, the present study expects that client intimidation in an audit conflict situation
will have an impact on auditor’s stress outcome, namely perceived pressure. Subsequently, the level
of auditor’s perceived pressure will affect auditor independence (i.e. auditors sign-off on the net
equipment account balance for the equipment in question). The higher pressure perceived by the
auditor thus the higher the auditor will sign-off on the net equipment balance. Hence, the next
hypotheses are constructed as follows:
H2
H
: Auditors in an audit conflict situation that is accompanied by client intimidation will perceive
higher pressure than those who experience a similar situation but without client intimidation.
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: Auditors’ perceived pressure will positively relate to the net equipment balance for equipment
in question signed-off by auditor in the presence of client intimidation.
Professional Commitment
The pressures model also shows that some individual variables could moderate the relationship
between pressures and stress-outcomes. Thereby, it is possible that a similar pressure that is
experienced by two or more auditors can produce different stress outcomes because of differences
in individual characteristics. The present study incorporates auditor’s professional commitment as an
individual variable that will moderate the relationship between pressures and stress-outcomes.
Professional commitment has been a concept of interest for researchers and practitioners in
accounting for more than 20 years (Hall, Smith, and Langfield-Smith, 2005). Professional commitment
refers to the attachment of individuals in the profession or, in other words, to the strength of an
individual’s identification with a profession. Individuals with high professional commitment are
characterized as having a strong belief in and acceptance of professional goals, a willingness to use
their efforts to advance the profession, and having a strong desire to maintain membership in the
profession. Prior studies showed that the strength of professional commitment has consequences on
performance improvement, turnover intentions, the level of satisfaction on the profession, and
ethical judgment (e.g. Jeffrey, Weatherholt, and Lo, 1996; Lord and DeZoort, 2001; and Hall et al.,
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2005). However, thus far, prior studies usually used a single-dimensional construct to measure
professional commitment, namely affective professional commitment. Focusing on a single
dimension of professional commitment only provides a partial understanding of the auditors’
profession (Hall et al.,
2005). By examining professional commitment in multiple dimensions, a
complete understanding of individual commitment to the profession will be provided (Meyer, Allen,
and Smith, 1993).
Meyer et al. (1993) develop a multidimensional construct of professional commitment and it was
adapted to the accounting field by Hall et al. (2005). Hall et al. (2005) argue that because
multidimensional professional commitment has found support in every profession and occupation;
hence, the unique characteristics of the public accounting profession will have a significant impact on
all dimensions of professional commitment as well. However, to date, there are no empirical studies
that investigating the role of all dimension of professional commitment on auditor independence.
The multidimensional of professional commitment consists of affective professional commitment
(APC), continuance professional commitment (CPC), and normative professional commitment (NPC)
dimensions. APC is the extent to which individuals "want to stay" in the profession because they
identify themselves with the goals of the profession and want to help the profession to achieve those
goals. NPC refers to the extent to which individuals feel they "ought to stay" in the profession as an
obligation. Finally, CPC is the extent to which individuals feel they "have to stay" in the profession
because of the accumulated investment that they have made (e.g. in study effort, training, etc.) and
also because of the lack of other alternatives. According to Hall et al. (2005), auditors who have high
levels of APC and NPC may feel a moral obligation to engage in behaviors that are beneficial to the
profession in order to maintain the profession reputation. On the other hand, auditors who have
high levels of CPC tend to be pragmatic and engage in behaviors that are beneficial to themselves.
The present study predicts that auditor’s professional commitment dimensions will moderate the
relationship between auditor’s perceived pressure and auditor independence (i.e. auditors sign-off
on the net equipment balance for the equipment in question). High levels of APC and NPC will
moderate to enhance auditor independence in case of audit conflict accompanied by client
intimidation. Meanwhile, a high level of CPC will moderate to induce the auditor to compromise his
or her independence. Therefore, the hypothesis 4, 5, and 6 can be constructed as follow:
H4: The levels of auditor’s APC moderate the relationship between auditor’s perceived pressure
and auditor signs-off on the net equipment account balance for the equipment in question.
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H5: The levels of auditor’s NPC moderate the relationship between auditor’s perceived pressure
and auditor signs-off on the net equipment account balance for the equipment in question.
H6
: The levels of auditor’s CPC moderate the relationship between auditor’s perceived pressure
and auditor signs-off on the net equipment account balance for the equipment in question.
METHOD
Subjects
Subjects were practicing auditors from national public accounting firms in Indonesia. Contact persons
in the public accounting firms were approached and asked for their willingness to administer the
research instrument within their firm. After that, a research instrument was handed in to the contact
persons. They then distributed the instrument to the subjects of their choosing. Two weeks after
that, the contact persons collected the completed instruments.
We received responses from our contact persons for 126 auditors - providing a response rate of
approximately 60 percent, of which 119 (88 responses under audit conflict that is accompanied by
client intimidation and 31 without client intimidation) had the data necessary for testing our
hypotheses. A demographic profile of subjects is provided in Table 1. The representative subjects
were staff and senior auditors with approximately 46.8 months experience on the average. Fifty-one
percent of the subjects were male and forty-nine percent were female; hence indicating a balanced
gender in the data. Seventy-three percent of the subjects had bachelor and 20 percent had diploma
education. The average age of the subjects was 27 years old.
Insert Table 1 about here
Procedure
Data used to test the hypotheses were collected using a research case instrument in which subjects
responded to one of two manipulated treatments, i.e. audit conflict accompanied by client
intimidation and that without client intimidation. The case was randomly assigned to the subjects.
The research instrument consists of four parts. In the beginning, a short introductory letter is
provided which introduced the researchers and assures subjects of their anonymity and right to
refuse to participate without any consequences. Next, subjects are asked to read the assigned case
regarding a hypothetical public accounting firm that was auditing a hypothetical firm. In the case
description, an audit conflict is included, as explained below. After reading the case, subjects are
asked to decide how much they will sign-off on the net equipment account balance for the
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equipment in question based on information in the case. The second part relates to subjects’
perceived pressure. The third part relates to a multidimensional professional commitment. The
instrument ends with questions regarding subjects’ demographic data.
An auditor-client conflict case is applied as a research instrument.
Case
The case was adapted from Lord
and DeZoort (2001); however, the case has been adjusted and rephrased in order to make it fit-in
with the purpose of this study. In the case, subjects were asked
to hypothesize themselves as the
responsible auditor, whose the team has been assigned to a new client. In the auditing process, the
subject cannot verify the existence and valuation of 2.5 billion Rupiah of equipment (approximately
equal to 2.5 million USD). Based on this finding, the subject proposes the client’s CFO to write-off the
equipment. In the audit conflict situation that is accompanied by client intimidation (treatment A),
the client’s CFO strongly disagrees with the subject’s proposal. The CFO also attacks the competence
of the subject and the subject’s staff and threatens to replace the subject’s audit firm as the client
auditor. The CFO insists that the equipment is in the plant but cannot be separately identified. The
CFO also suggests keeping the equipment as recorded and begins depreciating the equipment from
2011 to 2015 using the straight line method. On the other hand, in the audit conflict situation
without client intimidation (treatment B), the client’s CFO only disagrees with the subject’s proposal.
The CFO said that the equipment is in the plant but cannot be separately identified. The CFO suggests
keeping the equipment as recorded and begins depreciating the equipment from this year using the
straight line method.
The case was reviewed by audit partners as well as pilot tested in the study by Lord and DeZoort
(2001). We applied similar procedures to revalidate it. First, after having been adjusted and
rephrased, the case was assessed by two auditor partners. In doing so, the realism of the case is
guaranteed. The partners suggested that the case is realistic enough. Second, the case was pilot
tested by ten auditors, in order to assess the instrument clarity. Some minor adjustments were made
based on the pilot test.
Dependent variable
Auditor independence is the dependent variable. Prior studies are usually asked the participants to
respond in the probability or likelihood estimation forms. Borrowing Solomon’s argument (1994),
using these response forms will produce a mixed response variable and it is not clear what reliably
can be discerned from such measures. The present study measures auditor independence through
subjects sign-off on the net equipment account balance for the equipment in question. The subjects
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are asked to determine the value of net equipment account balance that they will sign-off within the
range from 0 to 2 million Rupiah. The higher the net equipment balance signed-off by the subjects
the more likely the subjects compromise independence.
Independent variables
We have both manipulated and measured independent variables. Our manipulated variable is client
intimidation that manipulated using a case. The case consists of two types of manipulated
treatments; the first is manipulated into audit conflict accompanied by client intimidation to the
auditor and the second is manipulated into audit conflict but without client intimidation.
The measured independent variables are perceived pressure and professional commitment. The
perceived pressure is measured by asking the subjects to indicate the extent to which they perceive
pressure from the client in the case. The eleven-point Likert scales anchored by 0 (does not perceive
pressure at all) and 10 (fully perceives pressure) are utilized.
The professional commitment is measured using a multidimensional instrument developed by Meyer
et al. (1993)
and adapted for the accounting profession by Hall et al. (2005). The instrument
separated among APC, CPC, and NPC dimensions in which each dimension is measured by six
question items. Subjects are asked to indicate the extent to which they disagree or agree with the
presented statements. For each item, seven-point Likert scales anchored by 1 (strongly disagree) to 7
(strongly agree) are utilized. Prior studies show that multidimensional of professional commitment
has good validity and reliability (Meyer et al., 1993; Smith and Hall, 2008; Somers, 2009). To test the
instrument’s validity this study correlated each item question score with the total score in each
dimension. The results show that each item question score is significantly correlated with the total
score. The score ranges from 0.681 to 0.774 for APC, 0.771 to 0.847 for NPC, and from 0.518 to 0.772
for CPC. Moreover, all correlations are statistically significant (ρ < 0.01). The alpha coefficients of
APC, NPC, and CPC are 0.807, 0.889, and 0.755, respectively. For hypotheses testing purpose, each
dimension of professional commitment is measured through single index by averaging the item
scores. Additionally, the subjects were asked whether they have had experience facing client
intimidation in the auditing assignments. The result showed that 48% of subjects responded that
they have had the experience and 52% have not.
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RESULTS
Manipulation check and Descriptive Statistics
To test the effectiveness of
manipulated-treatment, we compare subjects’ perceived pressure both
the groups with and without client intimidation. Subjects were asked to respond how far they
perceive pressure when facing audit conflict based-on the assigned case. An eleven-point Likert-type
scale is used as a response scale, ranging from not perceiving any pressure at all (0) to fully
perceiving pressure (10). On average, the subjects under client intimidation perceive higher pressure
(4.77) than the others (3.52). The results indicate that the manipulated treatment was effective.
Second, subjects were asked to respond whether the case is realistic enough or not. A seven point
Likert-type scale is used as a response scale from completely realistic (1) to completely unrealistic (7).
In average, the subjects suggest that the case was realistic enough, with mean value 2.
Analysis of variance (ANOVA) and regression analyses are used to test whether demographic
variables have possible effects on subject responses. ANOVA analysis shows that neither gender,
rank, nor education affected subject responses. Regression analysis shows neither experience nor
age affected subject responses. Hence, demographic variables are excluded from further analysis.
The dependent variable is auditor independence, proxied by the subjects sign-off on the net balance
of the equipment in question. The higher the net equipment balance signed-off by the subjects, the
more likely the subjects compromise independence. The independent variables are manipulated
treatments (i.e. audit conflict with or without client intimidation), perceived pressure and
professional commitment (consisted of APC, NPC, and CPC). Table 2 presents the descriptive
statistics for both the dependent and independent variables.
Insert Table 2 about here
Tests of Hypotheses
The main focus in this study is to test whether auditors will compromise their independence when
facing the audit conflict situation that is accompanied by client intimidation. The H1 predicts that
auditors under client intimidation will sign-off higher on the net equipment account balance for the
equipment in question than those who are in similar situation but without client intimidation. The
higher the net equipment balance signed-off by the auditors, the more likely the auditors
compromise independence. The manipulated independent variable is divided into two treatments:
the presence and absence of client intimidation in the audit conflict situation. The mean responses of
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the net equipment balance signed-off by the subjects under the audit conflict with and without the
client intimidation are 726,704,545.5 and 366,129,032.2 Rupiah, respectively. To test the H1, ANOVA
analysis is used and the results show that the manipulated variable is difference and statistically
significant (F = 5.032; p < 0.05). The result indicates that auditors under audit conflict that is
accompanied by client intimidation will compromise their independence compared to those who
experience the similar situation but without client intimidation. Thereby H1
is supported.
H2 predicts that auditors under audit conflict that is accompanied by client intimidation will perceive
a higher pressure than will those who face similar conflict but without client intimidation. The mean
values of perceived pressure of auditors in audit conflict with and without client intimidation are
4.77 and 3.52 on the eleven-point scale, respectively. To test this hypothesis, ANOVA is used and the
result showed that these two means are significantly different (F = 4.329; p < 0.05); hence H2
is
supported.
H3 to H6 relate to the impact of auditors’ perceived pressure on auditor independence and the
moderating role of multidimensional professional commitment on that relationship. To test such
hypotheses, including the interaction component, prior studies have usually utilized ANOVA analysis
using the median value of non-categorical variables to create a categorical proxy. The median
provides a cut-off point for dividing the data into two subgroups (e.g. high and low levels). However,
according to West, Aiken, and Krull (1996), this approach tends to reduce statistical power and yield
vague results. Therefore, a regression approach that is common in management accounting
literature (e.g. Dunk, 1991; Lau and Tan, 1998; Tsui, 2001; and Fellix, Gramling, and Maletta, 2005) is
used. To facilitate interpretation, in accordance to the suggestions of Jaccard and Turissi (2003) and
Aiken and West’s (1991), the data of multidimensional professional commitment is mean centered.
Mean centered reduces the multicollinearity between main effects and the interaction
𝑌𝑌 = 𝛽𝛽0 + 𝛽𝛽1𝑋𝑋1 + 𝛽𝛽2𝑋𝑋2 + 𝛽𝛽3𝑋𝑋3 + 𝛽𝛽4𝑋𝑋4 + 𝛽𝛽4𝑋𝑋1𝑋𝑋2 + 𝛽𝛽5𝑋𝑋1𝑋𝑋3 + 𝛽𝛽6𝑋𝑋1𝑋𝑋4
terms. The
regression model is run only for the data of the group under client intimidation. The regression
model is stated as follows:
where:
Y = the net equipment balance signed by the subjects;
X1 = perceived pressure;
X2 = affective professional commitment;
X3 = normative professional commitment;
16
X4
= continuance professional commitment.
Table 3 presents the regression results of the regression model.
Insert Table 3 about here
H3 predicts that the pressure perceived by the subjects is positively related to the net equipment
balance signed by them. Table 3 shows that the regression coefficient of perceived pressure (t =
0.41; p = 0.523) has a positive sign as predicted; however, it is not statistically significant. Hence, we
find no support for H3.
Finally, to consider H4 to H6, this study investigates whether the dimensions of professional
commitment moderate the forms of relationship between auditors’ perceived pressure and
auditors’ willingness to sign-off on the net equipment balance. As depicted in Table 3, the regression
results show that there are marginally significant interactions between auditor’s APC and perceived
pressure (t = -1.919; p-value < 0.1) and significant interaction between auditors’ CPC and auditor’s
perceived pressure (t = 2.710; p-value < 0.05). The interaction between auditor’s NPC and perceived
pressure are not statistically significant, however. Hence, we found support for H4 and H6, but not
for H5
.
To assist the interpretation of the moderation results, this study plots the high and low levels of
auditors’ APC and CPC respectively on the relationship between auditors’ perceived pressure and
auditors’ willingness to sign-off the net balance (figures 1 and 2). As showed in Figure 1, the
relationship between auditors’ perceived pressure and auditors’ willingness to sign-off on the net
balance is more negative when auditors’ APC is high and positive when auditors’ APC is low. On the
contrary, Figure 2 shows that there is a positive relationship between auditors’ perceived pressure
and auditors’ willingness to sign-off on the net equipment balance when auditors’ CPC is high.
Meanwhile, when auditor’s CPC is low, there is a negative relationship between auditor’s perceived
pressure and auditor’s willingness to sign-off on the net equipment balance.
Figure 1 about here
Figure 2 about here
17
CONCLUSIONS
The present study provides evidence on how auditors will compromise their independence in the
audit conflict that is accompanied by client intimidation. Client intimidation in this research is
materialized into a threat by the client to replace an auditor if the auditor does not adopt client’s
position in the questioned equipment. Moreover, auditor independence is proxied by the net
equipment balance signed-off by the auditors for the equipment in question. Specifically, this study
found that auditors will compromise their independence when the audit conflict is accompanied by
client intimidation. The finding indicates that an auditor has a weak bargaining position with a client,
especially in an audit conflict situation that is accompanied by client intimidation. It might also
indicate that motivation to retain the client is very important for auditors and the risk of losing the
client would deteriorate auditor independence, irrespective of any contingent factors.
The finding raises issues about mechanisms that can avoid an auditor from impairing his or her
independence caused by the risk of losing a client. One possible mechanism that can be considered
is a mandatory retention regime as discussed in the few accounting literature (Dopuch, King, and
Schwartz, 2001; and Comunale and Sexton, 2005). The mandatory retention requires a client to
retain an auditor at a specified number of years. This mechanism can possibly protect an auditor
from risk of losing the client and thereby avoiding the auditor from intimidation induced by the
client’s threat to replace the auditor. However, the possible negative side effects of this mechanism
should be taken into account before implementing it as well. Further study should address this issue
and combine it with the client intimidation issue.
Regarding auditors’ perceived pressure, this study finds that auditors under audit conflict that is
accompanied by client intimidation will perceive more pressure than those who under similar
conflict but without client intimidation. However, the relationship between the levels of auditors’
perceived pressure on auditor independence - though the regression coefficient shows a positive
sign - is not statistically significant. This study also finds that the relationship between auditors’
perceived pressure and the net equipment balance signed-off by the auditors is moderated by the
auditors’ APC and CPC levels. As predicted by the theory, the higher the levels of APC the more likely
auditors will engage in behaviors that are beneficial to the profession. Otherwise, the higher the
levels of CPC the more likely auditors tend to be pragmatic and engage in behaviors that are
beneficial to themselves. These findings are consistent with the predictions that the relationship
between auditors’ perceived pressure and the net equipment balance signed by the auditors is more
negative when the level of auditors’ APC is high and more positive when the levels of auditors’ APC
18
is low. Correspondingly, the relationship between auditors’ perceived pressure and the net
equipment balance signed by the auditors is more positive when the level of auditors’ CPC is high
and more negative when the level of auditors’ CPC is low.
The interpretations of these results are subject to several limitations; accordingly, the results should
be interpreted cautiously. First, our research instrument was completed by the subjects at their
convenient time. On the one hand, this may involve in some loss of control, but on the other hand, it
also stimulates the real conditions in which auditors commonly make decisions. Second, Bennet and
Hatfield (2012) stated that client management may use explicit or implicit intimidation tactics to
auditors in order to achieve their goal. This study focuses only to the explicit intimidation tactic,
materializing to a threat by the client to replace the auditor. It is possible that auditors will respond
to explicit and implicit intimidation differently. Third, subjects in this paper were Indonesian auditors
that work in national audit firms. Factors specific to these subjects may limit the extent to which the
results could be generalized to auditors from other countries and international audit firms.
19
Table 1 Profile of Subjects
N = 119 Percent Gender (%) Female Male
49 51
Rank (%) Staff Senior Manager Partner
56 36 8 0
Education (%) Diploma Bachelor Master
20% 73 7
Experience (months) Mean Min Max Std Deviation
46.8
6 235
(48.4) Age (years) Mean Min Max Std Deviation
27 20 59
(6.3)
Table 2 Descriptive Statistics
Variable Mean SD Observed range
Theoretical range
Auditor’s sign-off 632,773,109.2 782,689,760.8 0 – 2 billion Rp 0 – 2 billion Rp Perceived pressure 4,45 2,93 0 - 10 0 - 10 Affective Professional
Commitment 29.96 4.64 19 - 42 6 – 42
Normative Professional Commitment
26.90 5.63 15 - 42 6 – 42
Continuance Professional Commitment
23.92 4.66 9 - 42 6 – 42
20
Table 3 Regression Results
a
Unstandardized
Coefficients
Standardized
Coefficients
t Sig.
B Beta
(Constant) 591,522,442.497 3.286 .002*
Perceived pressure 2,083,262.755 .072 .641 .523
APC 502,945,722.485 .507 2.106 .038
NPC
*
-170,759,166.452 -.205 -.887 .378
CPC -601,024,337.535 -.568 -3.267 .002
Perceived pressure x APC
*
-8,796,966.796 -.409 -1.919 .059
Perceived pressure x NPC
**
4,966,883.848 .264 1.251 .214
Perceived pressure x CPC 11,937,390.718 .473 2.710 .008* Note: a Dependent Variable: the net equipment balance signed-off by the subjects; N = 88; Adj R2 =8.5%; F = 2.157; p-value < 0.05; * Significant at p < 0.05; **
Significant at p < 0.1.
21
Figure 1 Interaction between Auditors’ Perceived Pressure
and Auditor’s APC
Figure 2 Interaction between Auditors’ Perceived Pressure
and Auditor’s CPC
22
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