Article2003

The Impact of Retention Incentives and Client Business Risks on Auditors' Decisions Involving Aggressive Reporting Practices

Chengyee Janie Chang · Nen-Chen Richard Hwang

47 citations0/0 files storedAuditing A Journal of Practice & Theory

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Auditing, Earnings Management, Governance Accounting and Organizational Management Corporate Governance and Financial Management

Abstract

This research examines the individual and interactive effects of client retention incentive and client business risks on auditors' decisions regarding whether to accept clients' aggressive reporting practices. Fifty-five audit seniors and managers from all of the Big 5 accounting firms participated in this experimental study. We find a significant main effect of client business risks and an interactive effect between client retention incentives and client business risks on auditors' decisions. Specifically, the results indicate that, when a client's business risks are high, auditors tend to scrutinize such risks and carefully evaluate a client's proposed accounting practices. However, when there is less concern over a client's business risks, auditors may be willing to accept the client's aggressive reporting proposal if retention incentives are high.

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References

2013Experimental Design: Procedures for the Behavioral Sciences 1981Auditor size and audit quality 1999A Review of the Earnings Management Literature and Its Implications for Standard Setting 1994Debt covenant violation and manipulation of accruals 2000A Guide to Modern Econometrics 1999The Role of Big 6 Auditors in the Credible Reporting of Accruals 1994Debt-covenant violations and managers' accounting responses 2008Financial Accounting Standards Board (FASB)

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2010Litigation environment and auditors’ decisions to accept clients’ aggressive reporting 2010The effects of trust, client importance, and goal commitment on auditors' acceptance of client-preferred methods 2012The Auditor's Approach to Subsequent Events: Insights from the Academic Literature

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