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- Title
The Effects of Formal Sanctions on Auditor Independence.
- Authors
Shafer, William E.; Morris, Roselyn E.; Ketchand, Alice A.
- Abstract
This study investigates auditors' perceptions of the effectiveness of formal sanctions as incentives for maintaining independence. A model of the effects of formal sanctions on auditors' ethical judgments and behavioral intentions was developed and tested using structural equations. A sample of practicing auditors responded to a case involving audit client pressure for the use of aggressive reporting. The moral intensity of the ethical dilemma was manipulated on a between-subjects basis. The results indicate that litigation risk and peer-review risk were perceived as significant deterrents to aggressive reporting decisions, but the risk of disciplinary actions by professional organizations was not. In addition, situational factors that influence moral intensity, such as the intended use of the audited financial statements and the dollar amount of the misstatement, significantly affected the perceived likelihood of sanctions occurring, as well as the perceived acceptability of aggressive reporting. The findings of this study also raise concerns regarding auditors' willingness to acquiesce in aggressive financial-reporting decisions. For example, participants estimated a 51 percent chance that the average auditor would issue an unqualified opinion on a set of financial statements that contained an apparent misstatement equal to 40 percent of net earnings.
- Subjects
AUDITORS; LABOR incentives; MANAGEMENT controls; DECISION making; ACCOUNTING firms; AUDITOR-client relationships
- Publication
Auditing: A Journal of Practice & Theory, 1999, Vol 18, Issue 2, p85
- ISSN
0278-0380
- Publication type
Article