Auditor objectivity as a function of auditor negotiation self-efficacy beliefs
Introduction
This study investigates whether auditor negotiation self-efficacy predicts individual-level outcomes of auditors exercising discretionary judgements in a domain-level negotiation self-efficacy concept (cf. Miles & Maurer, 2012). Some researchers argue that financial statements are the result of a negotiation between auditors and the client firm's management (Antle & Nalebuff, 1991; DeAngelo, 1981; Wright & Wright, 1997). Since auditors desire an accurate audit outcome, they must be able to successfully negotiate with their clients to obtain their desired financial position in a contested situation (McCracken, Salterio, & Gibbins, 2008). Research suggests that, in an effort to manage the audit's outcome, clients may seek to control the audit process from the beginning (Hellman, 2011), and that this influence over the auditors is higher for more experienced, as compared to less experienced, internal managers (Sweeney & Pierce, 2011). Prior studies have investigated the negotiation tactics used (Bame-Aldred & Kida, 2007; Gibbins, McCracken, & Salterio, 2010; Svanberg, Öhman, & Neidermeyer, 2018), and the factors determining the outcome of the negotiations (Perreault, Kida, & Piercey, 2017).
Given that the joint product of the auditor-client negotiation is the external audit and that the accompanying financial statements require consensus decisions, it is important for each party to be able to convince the other of the truth and fairness of its own preferred resolution of a discretionary accounting issue. The auditor's ability to remain faithful to a view informed by the auditor's objective judgment may depend on the perceived ability of the auditor to justify that view, despite knowledge that the client may have convincing arguments for the opposite position. If the auditor does not believe the argument can be won, auditor objectivity is threatened, since the auditor may be more likely to accept the client's point of view. Convincing the client might seem difficult at times, especially bearing in mind that the client's accounting experts will argue against the adjustment (Beattie, Fearnley, & Brandt, 2001; Gibbins et al., 2010). This paper argues that an auditor's individual confidence in the auditor's ability to successfully contend with clients about discretionary accounting issues impacts the extent to which the auditor may form an objective opinion outside the client's sphere of influence.
We conceptualize this aspect of the auditor's self-confidence using the concept of “auditor negotiation self-efficacy”, which is the auditor's perceived ability to successfully negotiate material accounting issues with clients, and examine the extent to which an auditor's perceived ability to successfully negotiate material accounting issues with clients increases the auditor's objectivity in assessing discretionary accounting issues. Auditor negotiation self-efficacy may serve as a barrier to objectivity threats such as financial incentives (e.g., Kadous, Kennedy, & Peecher, 2003) and non-financial incentives like auditor-client identification (e.g., Bamber & Iyer, 2007) and client leadership (Svanberg, Öhman, & Neidermeyer, 2017). This mitigation would occur in situations in which the auditor has a directional motive (e.g., financial gain) as opposed to the accuracy motive associated with the auditor's professional identity (cf. Bauer, 2014; Cianci & Bierstaker, 2009). Given that high negotiation self-efficacy could encourage auditors to adopt assessments in accordance with the accuracy goal, the present study also examines whether auditors' accuracy motive moderates the impact of auditors' negotiation self-efficacy on auditor objectivity. We anticipate that auditor objectivity does not depend on auditors' negotiation self-efficacy when the accuracy motive is very strong because a strong and salient professional identity is effective protection against lenient auditing (Bauer, 2014), but we anticipate a positive relationship between auditors' negotiation self-efficacy and auditor objectivity for weak and moderate accuracy motives. While prior studies of auditor objectivity have focused largely on the idea that the auditors' judgment is biased as a result of incentives, our analysis investigates the phase that transforms auditor motivation into action. This approach resembles the one described by Wright and Wright (1997) in trying to understand objectivity. They discuss the difference between detecting a misstatement and reporting it, and note that prior studies had addressed the ability to detect misstatements (judgment bias) but not the propensity to report it (potentially depending on relevant self-efficacy).
Our hypotheses are developed from the literature demonstrating how self-efficacy impacts behaviour. This literature defines self-efficacy as “a belief in one's capabilities to organize and execute the courses of action required to produce given attainments” (Bandura, 1997, p. 3), and finds that individuals are unlikely to act or persevere if they do not believe that their actions will have the desired outcomes (Chen & Bliese, 2002; Stajkovic & Luthans, 1998). The more successful that individuals believe they can be, the more ambitious are their goals with regard to a given activity (Locke, Frederick, Lee, & Bobko, 1984; Merchant, 2006). Self-efficacy thus helps determine the goals that an individual will pursue and the amount of goal attainment expected (Locke & Latham, 1990); it serves above all as a catalyst for the conversion of motivation to action, with familiar actions being more likely, ceteris paribus. The impact of self-efficacy on decisions and behaviour has been consistently evidenced in many areas (Bandura, 1977; Bouffard-Bouchard, 1990; Chen & Tutwiler, 2017; Phillips & Gully, 1997; Stajkovic & Luthans, 1998), including accounting education (Ahmad, Ismail, & Anantharaman, 2015; Schleifer & Dull, 2009) and auditing (Iskandar, Sari, Mohd-Sanusi, & Anugerah, 2012). However, the concept has not been used in research on auditor objectivity. Given that decisions motivated by a desire for accuracy would require that auditors have confidence in their ability to defend their opinions against possible client objections, the context of an auditor's decision-making environment may be viewed as a negotiation (McCracken et al., 2008), with the auditor anticipating a need to defend her position. Accordingly, negotiation self-efficacy would be a relevant concept in the audit context. The negotiation literature provides a foundation for exploring the likely impact of negotiation self-efficacy on decision objectivity, i.e., how self-efficacy affects both the negotiator's approach and the negotiation outcome (cf. Sullivan, O'Connor, & Burris, 2006).
We test the developed hypotheses using a cross-sectional design employing a survey asking auditors first to assess their individual auditor negotiation self-efficacy and subsequently to make a decision about a case describing a material accounting issue involving their largest client. Auditor objectivity is measured as the extent to which the auditor's decision about the case expresses a concession to the client's desired accounting treatment. We then study the association between perceived auditor negotiation self-efficacy and auditors' concessions to client requirements, while controlling for several variables known from previous studies to affect auditor objectivity.
Our results find a positive relationship between auditor negotiation self-efficacy and objectivity, which is important for two reasons. First, the examination extends the accounting literature by establishing a link between motivation and assessment. Previous research on auditor objectivity has focused on the existence of motives while not addressing other factors that could link motivation to action. In particular, research using archival data to investigate the impact of financial incentives on auditor objectivity (e.g., Dart, 2011; Hackenbrack & Nelson, 1996) neglects self-efficacy in the transformation of motivation into action.
Second, our main finding, that auditors with high negotiation self-efficacy are more objective than are their peers, adds to the research describing methods to enhance auditor objectivity. In comparison with traditional methods of enhancing objectivity, the strengthening of negotiation self-efficacy would offer two benefits. One is that the impact of negotiation self-efficacy does not require auditors to be aware of how threats to objectivity affect their assessments of accounting issues. Methods that do require auditors to be aware of such threats and to take appropriate action in response may be inadequate because objectivity threats subconsciously bias auditor cognition (Cianci & Bierstaker, 2009; Svanberg & Öhman, 2015), rendering traditional methods of decreasing these threats (e.g., auditor rotation or stepping down from an audit assignment) potentially ineffective. A second is that ensuring high negotiation self-efficacy can counteract short-tenure objectivity threats, which is impossible with auditor rotation. This is important given the many threats that arise quickly, potentially after only a few interactions (Bauer, 2014). Audit firms can use reinforcement of auditor negotiation self-efficacy to counter short-tenure threats since self-efficacy can be enhanced by methods under their control (cf. Bandura, 1997), e.g., by appropriate recruitment and/or training (Miles & Maurer, 2012; Sullivan et al., 2006), or through role modelling of the leadership in the organization in which the person works (Conger & Kanungo, 1987; Shamir, House, & Arthur, 1993; Van Knippenberg et al., 2004).
Section snippets
Threats to auditor objectivity
Research on auditor objectivity seldom discusses the psychological processes through which an auditor's judgment is biased by perceived directional motives. According to our review of the literature, there are only a few attempts to discuss the psychological processes, and these are based on motivated reasoning theory (Kunda, 1990). The accounting literature has examined two types of threats to auditor objectivity: the extent to which financial factors (e.g., Hollingsworth & Li, 2012; Kadous et
Sample and data collection
Using a register from Revisorsinspektionen (the Swedish Supervisory Board of Public Accountants), we selected a random sample of 800 experienced auditors in Sweden and e-mailed them a link to a survey. This approach ensured the anonymity1
Descriptive statistics
Demographic information about the respondents is summarized in Table 1. The respondents, most of whom are male, are equally distributed between Big 4 and other audit firms. On average, the respondents are 47.3 years old and have been auditors for approximately 20 years. Their long experience indicates that the sampled auditors are in positions in which contact with client management and decisions on important auditing issues should be relevant. The average length of time that they have audited
Discussion
The present study applied a domain-level negotiation self-efficacy concept (cf. Miles & Maurer, 2012) to auditor-objectivity research in order to assess the ability of auditor negotiation self-efficacy to predict the individual-level outcomes of auditors' exercise of discretionary judgment. Auditor negotiation self-efficacy is an auditor's perceived ability to successfully negotiate a material and discretionary accounting issue with his or her clients, and we anticipated that this perceived
Financial support
The researchers wish to thank Handelsbankens Forskningsstiftelser for their financial support of this project.
Jan Svanberg is Assistant Professor (Ph.D.) of business administration at the University of Gavel. His research interests are behavioural issues, primary in accounting and auditing.
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Cited by (0)
Jan Svanberg is Assistant Professor (Ph.D.) of business administration at the University of Gavel. His research interests are behavioural issues, primary in accounting and auditing.
Peter Öhman is Professor (Ph.D.) of business administration at Centre for Research on Economic Relations (CER) at Mid Sweden University. His research interests are primary in accounting, auditing and banking.
Presha E. Neidermeyer, Ph.D., CPA is a Professor of Accounting at West Virginia University. Her primary research interests are in international auditor behaviour and gender issues.