Business School

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• Business School

The Influence of a Self-Interest Threat to
Auditor Independence and Emotion on Auditors
Inventory Judgments Janne Chung York
University Jeffrey Cohen Boston College Gary
Monroe - UNSW
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Overview of the paper

• Using an experiment, we investigate the effects
  of ethical conflict and emotion on auditors
  inventory judgments
• We manipulate emotion and self interest threat in
  an experimental case and ask auditors what
  inventory value they will recommend for the
  client in the case materials
• We expect that the presence of a self interest
  threat will lead individuals to value the
  clients ending inventory less conservatively
• We expect that a more positive emotion will lead
  to less conservative inventory judgments compared
  to a more negative emotion.
• We expect an interaction effect between self
  interest threat and emotion
• The results confirm our expectations

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Introduction

• We examine whether the presence/absence of a job
  offer from an audit client affects auditors
  judgments
• Job offer during the audit of the client creates
  a potential conflict of interest (self-interest
  threat)
• We examine the effect of emotion on audit
  judgment
• Affective states including emotion have a long
  history in the psychology literature, but have
  been largely overlooked by auditing researchers
• We extend the findings in the psychology
  literature to the audit profession and contribute
  to our understanding of how emotion could affect
  audit judgment

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Introduction

• Psychology literature reports that affective
  state (mood) impacts ethical decision-making
• Apart from Connelly et al. (2004) who examine
  management issues using college students, no
  study has examined the effect of emotion on
  ethical decision-making
• With the exception of Cianci and Bierstaker
  (2009) who examine the effects of moods on
  ethical decision-making in a hypotheses-generation
  task, we are not aware of any other auditing
  study that has examined this issue
• Therefore, we examine the interaction effects
  between emotion and the presence (absence) of an
  self interest threat on audit judgment

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Ethical conflict

• People tend to respond to conflicts of interest
  through decision-making biases (Bastedo 2009).
• When individuals are presented with situations
  where personal self-interest is contrary to
  ethical behavior, their response is potentially
  one of self-interest. This bias is unconscious,
  which makes it difficult for people to recognize
  that their decision is affected by self-interest
  (Moore and Loewenstein 2004)
• Self-interest may play a role in strengthening
  peoples decision heuristics such as
  unconsciously biasing even routine
  decision-making (Chugh, Bazerman, and Banaji
  2005 Simon, 1957 Tversky and Kahneman 1974).
• Conflicts of interest create ethical dilemmas
  that influence an individuals independence
  (Premeaux 2004)

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Ethical conflict

• When a client makes a job offer to an audit team
  member, it could create a conflict of interest
  for the audit staff member
• auditor may act as an advocate for the client by
  making decisions that are in the clients favor,
  for example, by signing off on less conservative
  asset or liability values.
• H1 Participants who read case materials
  containing a conflict of interest expect an
  auditor to act out of self-interest by
  recommending less conservative inventory values
  to the audit manager compared to participants who
  did not read case materials containing a conflict
  of interest.

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Emotions

• Positive affect
• results in positive views of the judgment context
  
• leads to more positive judgments of self and
  others (Clore et al. 1994)
• more likely to overestimate the likelihood of
  favorable events occurring and underestimate the
  likelihood of unfavorable events occurring
  (Nygren et al. 1996)
• Chung, Cohen and Monroe (2008) find that positive
  affective state (mood) leads to less conservative
  inventory valuation by auditors

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Emotions

• Negative affect
• results in negative views
• leads to more negative evaluations and actions
  (Forgas 1992)
• Kadous (2001) demonstrates that negative emotions
  in an auditor negligence case affected jurors
  judgment of auditors - higher levels of negative
  emotion resulted in a more negative evaluation of
  auditors and higher penalties were handed out to
  them
• Chung, Cohen and Monroe (2008) find that negative
  affective state (mood) leads to more conservative
  inventory valuation by auditors

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Emotions

• We manipulate emotion as positive, neutral and
  negative
• H2 Participants in the negative emotion
  condition expect an auditor to recommend
  inventory values to the audit manager that are
  more conservative compared to auditors in the
  positive emotion condition. 

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Joint effects of self-interest and emotion

• H3a Positive-emotion participants who read case
  materials that contained a job offer expect an
  auditor to make significantly less conservative
  judgments relative to all other conditions.
• H3b Negative-emotion participants who read case
  materials that did not contain a job offer expect
  an auditor to make significantly more
  conservative judgments relative to all other
  conditions.
• H3c Positive-emotion participants who read case
  materials that contained a job offer expect an
  auditor make significantly less conservative
  judgments relative to negative-emotion
  participants who read case materials that did not
  contain a job offer.

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Participants

• 96 (49 males and 47 females) auditors with 4
  years of experience 51 in-charge seniors and 45
  supervisors or managers
• average age - 30 years
• average working experience - 101 months
• average accounting working experience - 91 months
• average auditing working experience - 84 months
• average of 13 inventory audits
• 76 worked for Big 4 firms
• Paid 50 for participating

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Experiment

• Participants read experimental materials about an
  audit client. First, read information concerning
  Pat, an in-charge audit senior whose career
  progression is on track
• To create self-interest threat, half read case
  materials informing them that Pat is considering
  accepting a very attractive job offer from the
  client and he had not disclosed this
• Other half read case materials that did not
  contain a job offer
• Next, all participants were told that Pat is
  assigned the inventory section of the audit of an
  electronics manufacturing company

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Experiment

• All participants given same background
  information about the client, e.g., history of
  client, financial statements, information on
  corporate governance
• Detailed information specific to the current
  years audit of inventory was provided
• Participants informed that procedures for this
  section of the audit had been satisfactorily
  completed
• However, difference of opinion between Pat and
  the client regarding the valuation of inventory
• Initial audit testing indicated caused Pat to
  estimate inventory should be valued at
  136,000,000 compared to the clients carrying
  amount of 148,000,000

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Experiment

• Participants informed that Pat meets with
  clients financial controller (FC) to discuss
  possibility that inventory may be overstated,
  next course of action to take, and possibility of
  hiring independent valuers
• At this point, the emotion manipulation was
  introduced.
• Participants read the conversation between Pat
  and the VP
• Positive emotion - materials describe a kind,
  helpful, and courteous FC
• Neutral emotion materials describe a FC who is
  neither mean nor kind, helpful nor unhelpful, and
  discourteous nor courteous
• Negative emotion materials describe a mean,
  unhelpful, and discourteous FC

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Experiment

• Based on the conversation between Pat and the FC,
  the services of two independent appraisers (A and
  B) are secured and both return a range of
  valuations that are lower than the clients with
  As being lower than Bs.
• A 129,600,000 134,000,000
• B 137,400,000 140,600,000
• Participants then answered two questions
• What inventory balance would Pat recommend to the
  audit manager?
• What inventory balance would you recommend to the
  audit manager?
• they wrote down the value
• Participants then responded to manipulation
  checks and provided demographic data.

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Manipulation checks

• Pleasure, Arousal, and Dominance (PAD) scale used
  to measure emotions and responses to
  environmental stimuli
• PAD scale does not purport to measure emotions
  per se, instead it assesses the perceived
  pleasure, arousal and dominance elicited by a set
  of environmental stimuli
• Pretesting indicated our case materials only
  triggered the Pleasure dimension so we only
  included scales relating to that dimension
• 7 items anchored by pleased (annoyed) hopeful
  (despairing) happy (unhappy) satisfied
  (unsatisfied) relaxed (bored) contented
  (melancholic) and stimulated (relaxed)
• Responses on a 7-point scale we sum the scores
  for the 7 items higher score is more negative

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Manipulation checks

• Results for PAD
• positive 17.4 (6.6)
• neutral 24.1 (6.2)
• negative 35.5 (4.5)
• ANOVA and Games-Howell tests used to test
  differences
• positive-emotion participants experienced higher
  pleasure than neutral-emotion participants (p lt
  .001)
• neutral-emotion participants experienced higher
  pleasure than negative-emotion participants (p lt
  .0001)
• Self rated their expertise relatively high - 5
  out of 7
• Rated realism of case materials good - 4.8 out
  of 7

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Results

• More conservative is lower value

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Results
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Results

• Contrast coding used

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Results