Understanding Auditor-Client Relationships: A Multi-Faceted Analysis (Rutgers Series in Accounting Research) - Hardcover

Kleinman, Gary; Palmon, Dan

Hardcover

ISBN 10: 1558761802 ISBN 13: 9781558761803

Publisher: Markus Wiener Pub, 1997

Synopsis

This book is of significant assistance to researchers, regulators, and practitioners who are interested in the extremely important topic of auditor independence. The authors have created a comprehensive model of the individual, workplace, organization, inter-organizational, and organizational field level determinants of auditor independence. This model simultaneously accommodates and integrates both macro and micro level issues with respect to auditor independence. Its ability to do so stands in stark contrast to the current literature, which deals almost exclusively with micro-level issues.

Concerning auditor and client, the book explores the effects of their respective organizational cultures, the history of the interaction between these parties, and the broader social and economic trends of their relationship. For researchers, the model provides both an organizing framework for extant research and a very fruitful source of research hypotheses. Regulators should be able to use the presentation of theory and analysis in evaluating potential independence-compromising problems. Practitioners can also benefit from the deep insight that the book provides.

About this title

About the Author:

About Gary Kleinman:
An assistant professor at the New Jersey Institute of Technology, specializing in auditor-client relationships and group dynamics.

About Dan Palmon:
The Chair of the Accounting and Information Systems Department at Rutgers University.

Review:

The Enron scandal has underscored the need to understand the relationship between auditor and client and demonstrated that society bears a heavy burden when this relationship tails. Owing to this scandal it is likely that a number of research issues will be initiated. It is especially helpful if former research studies' limitations are known and serve as the starting point of new research projects. Based on such limitations, the objective of this monograph is to provide a better understanding of the auditor-client relationship. So far, a significant number of studies related to auditor-client relationships in general, and independence in particular, have been undertaken. Because of the absence of an organizing framework, these studies are difficult to combine and synthesize into coherent articulations of scientific knowledge. In an attempt to solve this problem, the authors develop an integrative, multi-level model of auditor motivation and action that includes the individual auditor, work group, audit firm and auditor-client levels. In addition, the consideration of auditor-client relationships from the suggested multi-level model could enable researchers to regard connections with the contextual issues surrounding auditing in practice in their work. When reading the monograph, four different parts can be recognized. The first part (Chapters 1 and 2) deals with the concept of independence and prior research on auditor independence. In the second (Chapters 3 to 5) and third part (Chapter 6), the authors develop a two-tier model of auditor-client relationships. The two tiers comprise a micro and a macro level. In the final part of the monograph (Chapter 7) conclusions from the development of the research model are drawn and implications are deduced. The introductory Chapter 1 reviews the importance of the independent auditor's role in validating information provided to investors and in reducing the information risk premium. Definitions of auditor independence are discussed, a new definition of auditor independence is suggested (non-subordination to all sources' influence that detract from impartial judgement) and critical questions regarding the independence issue are raised. Last, the first chapter provides a brief survey of the model of the factors that lead to or detract from auditor independence. In Chapter 2, essential models of factors that affect actual auditor independence are described and their limitations are examined: economic models (De Angelo's economic model and Antle's agency theory) and behavioral science models (resource dependence model and exchange theory). Besides existing theories of auditor-client relationships, some related perceptual research is introduced. It is important because it provides information about how others expect the auditor to behave in certain situations. The variables that affect such perceptions include: management advisory services, competitive audit markets, size of the audit firm, tenure of the auditor with the client, nature of the conflict and the financial condition of the client. Chapters 3 to 5 describe the within-audit firm influences on auditors' behavior, i.e. develop the micro-level model. These chapters draw on social psychological and sociological theories to develop a model of determinants of intra-audit firm decision-making behavior. Researchers in psychology and sociology have studied conflict, motivation, perception, group dynamics, organizational formation and the effect of organizational structure on attitudes within the firm, and thus provide insights to improve the understanding of the auditor-client relationship by placing it in a much deeper and broader context. First, theories of intra-person determinants of individual behavior are presented (Chapter 3). These influences include the auditor's personality, values, motivational structures, age and career aspirations. While important, these influences alone are insufficient to explain an individual's behavior in a social setting. Psychological factors must be understood in a multi-person context. Therefore, the auditor is placed within his social context (Chapter 4). The focus of this chapter is the relationship between the partner-in-charge and others. His perceptions of his social world and how they influence his decision-making processes are discussed. The preferences of others influence the auditor's behavior to the extent that he seeks a way to accommodate others' preferences as well as his own. Means of ordering the preferences of others are also explained. It remains to place the individual within his organizational context. As a consequence, the auditor is situated within his firm by describing how such firm characteristics as firm culture and structure influence the auditor's behavior (Chapter 5). It is within that context that additional, powerful control mechanisms act to constrain the auditor to act, more or less, in a way that is consistent with organizational preferences. Larger audit firms are the focus here. Audit firms seek to survive. This survival, however, depends on the ability of these firms to engage their environment constructively. Certainly one key element in this environment is the nature of the client firm, its understanding of, and pressures on, the audit firm, and the probability that untoward pressures on the audit firm will be resisted. Audit firm members and their firms may feel tempted to give concessions to clients that others might believe are inappropriate. The impulse to give those concessions in many ways reflects the interactions between the characteristics of the audit firm, the characteristics of the client firm, the history of their interactions, and the nature of the organizational environment. These issues are addressed in Chapter 6 in which the macro-level model is developed. It concentrates on conflict situations because the focus of the book is on the determinants of auditor independence as they express themselves in the development of the relationship of the auditor and the client. Decision-making processes within the audit and client firms are discussed, as are the effects of the organizational environment on the interactions between the parties, and the development of the auditor-client relationship over time. On the one hand, the concluding Chapter 7 summarizes the theoretical work that has been developed to improve the understanding of the auditor-client relationship. The relationship of the two separate, but ultimately integrated, models of factors that influence the maintenance of auditor independence to prior work is demonstrated. Obviously, the model presented by the authors is more inclusive than those in earlier work are, since it is presenting the auditor-client relationship as a multi-dimensional one. On the other hand, Chapter 7 presents the implications of the study for the profession, the auditor-client relationship, accounting education, the management of public accounting firms, regulation and researchers. The objectives of the book are to improve the understanding of auditor independence, to help avert auditor independence problems and in particular to promote auditor independence research. Previous research studies usually deal with micro issues whereas macro influences acting in the firm, the client organization, industry and society are often ignored. The strength of the work provided by Kleinman and Palmon lies in its ability to simultaneously accommodate and integrate both micro- and macro-level constructs. Their model specifies the highly interdependent nature of the interactions between macro structures and the micro domain of individual decision-making behaviour and provides a framework for developing research projects to bridge this gap. The authors present a theoretical basis for better organizing and understanding the research in the area of auditor-client relations. Their theoretical framework provides a foundation for designing, categorizing and integrating research in the area of auditor-client relationships. For practitioners this monograph seems less beneficial because it is highly academically oriented. However, in my opinion this book is recommendable for researchers and regulators. Ph.D. students as well as more experienced researchers contemplating serious work in the area of auditor-client relationships generally and auditor independence specifically can benefit from the work. Regulators receive an insightful representation of the dynamics of auditor-client relationships. -- The European Accounting Review

About this edition

• Publisher: Markus Wiener Pub
• Publication date: 1997
• ISBN 10: 1558761802
• ISBN 13: 9781558761803
• Binding: Hardcover
• Number of pages: 128