Skip to main content
Log in

Auditors' Willingness to Advocate Client-Preferred Accounting Principles

  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

This paper argues that independent auditors have lost sight of their obligation to be truly impartial, and have increasingly adopted an attitude of client advocacy. We argue that auditors have a professional obligation to go beyond merely passing judgment on whether client accounting methods are acceptable under GAAP, and to judge whether the principles adopted are the most appropriate under the circumstances. We then review recent evidence which suggests that auditors have abandoned this objective in favor of advocating client-preferred principles. The results of a survey of public accountants employed by small CPA firms indicates that, in a scenario in which an auditor did not feel that the client's accounting treatment was the most appropriate under the circumstances but it was recognized as an acceptable alternative under GAAP, advocacy of the client-preferred approach is considered appropriate and is very likely to occur in practice. In less subtle cases (e.g., when the auditor did not feel that the client's treatment provided the best reflection of the economic substance of the underlying transactions), survey participants as a group were ambivalent regarding the appropriateness of client advocacy, and felt that subordination of judgment was likely to occur in practice. The results also indicate that engagement risk, or the risk that the firm will be harmed by aggressive behavior, affects judgments of both the appropriateness and likelihood of subordination of judgment. These findings suggest that auditors have adopted an ideology of client advocacy, within the constraints of engagement risk.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Advisory Panel on Auditor Independence: 1994, Strengthening the Professionalism of the Independent Auditor. Report to the Public Oversight Board of the SEC Practice Section, AICPA. Stamford, CT: Public Oversight Board.

    Google Scholar 

  • American Institute of Certified Public Accountants (AICPA): 2002a, Professional Standards, Volumes 1 and 2 (New York, NY: AICPA).

    Google Scholar 

  • American Institute of Certified Public Accountants (AICPA): 2002b, Annual Report 2001-2002. New York, NY: AICPA. Available at www.aicpa.org.

    Google Scholar 

  • Arnold, D. F. Sr., R. A. Bernardi and P. E. Neidermeyer: 1999, 'The Effect of Independence on Decisions Concerning Additional Audit Work: A European Perspective', Auditing: A Journal of Practice and Theory 18(Suppl): 45–67.

    Google Scholar 

  • Brewster, M.: 2003, Unaccountable: How the Accounting Profession Forfeited a Public Trust (Hoboken, NJ: John Wiley and Sons).

    Google Scholar 

  • Cohen, J., L. Pant and D. Sharp: 1995, 'Measuring the Ethical Awareness and Ethical Orientation of Canadian Auditors', Behavioral Research in Accounting 8(Suppl): 98–119.

    Google Scholar 

  • Doucet, M. S. and K. L. Hooks: 1999, 'Toward an Equal Future', Journal of Accountancy 187(6)(June): 71–76.

    Google Scholar 

  • Farmer, T., L. Rittenberg and G. Trompeter: 1987, 'An Investigation of the Impact of Economic and Organizational Factors on Auditor Independence', Auditing: A Journal of Practice and Theory 6 (Fall): 1–14.

    Google Scholar 

  • Ferrell, O. C. and L. G. Gresham: 1985, 'A Contingency Framework for Understanding Ethical Decision Making in Marketing', Journal of Marketing 49: 87–96.

    Google Scholar 

  • Financial Accounting Standards Board (FASB): 2002, Original Pronouncements: Accounting Standards, Volumes 1 and 2 (New York: John Wiley and Sons).

    Google Scholar 

  • Gramling, A. A.: 1999, 'External Auditors' Reliance on Work Performed by Internal Auditors: The Influence of Fee Pressure on This Reliance Decision', Auditing: A Journal of Practice and Theory 18(Suppl): 117–135.

    Google Scholar 

  • Hackenbrack, K. and M. Nelson: 1996, 'Auditors' Incentives and Their Application of Financial Standards', Accounting Review 71(1)(January): 43–59.

    Google Scholar 

  • Hunt, S. D. and S. Vitell: 1986, 'A General Theory of Marketing Ethics', Journal of Macromarketing 6: 5–16.

    Google Scholar 

  • Hunt, S. D. and S. J. Vitell: 1991, 'The General Theory of Marketing Ethics: A Retrospective and Revision', in N. C. Smith and J. A. Guelch (eds.), Ethics in Marketing. (Homewood, IL: Irwin), pp. 775–784.

    Google Scholar 

  • Jenkins, B.: 1999, 'Discussion of The Effect of Independence on Decisions Concerning Additional Audit Work: A European Perspective', Auditing: A Journal of Practice and Theory 18(Suppl): 75–77.

    Google Scholar 

  • Kohlberg, L.: 1984, Essays in Moral Development, Volume II: The Psychology of Moral Development (Harper and Row, New York).

    Google Scholar 

  • Levitt, A.: 1998, The Numbers Game. Address delivered at the NYU Center for Law and Business, New York: September 28.

  • Levitt, A.: 2000, Renewing the Covenant with Investors. Address delivered at the NYU Center for Law and Business, New York: May 10.

  • Levitt, A.: 2002, Take on the Street (New York: Pantheon Books).

    Google Scholar 

  • MacDonald, E.: 1999, 'SEC Crackdown on Merger Write-Off May Make Some Deals More Difficult', Wall Street Journal (January 4, 1999): A4.

  • McFadgen, D. N.: 1999, 'Discussion of External Auditors' Reliance on Work Performed by Internal Auditors: The Influence of Fee Pressure on This Reliance Decision', Auditing: A Journal of Practice and Theory 18(Suppl): 143–146.

    Google Scholar 

  • Melcher, R.: 1998, 'Where Are the Accountants? Why Auditors End Up Missing So Many Danger Signs', Business Week (October 5): 144–146.

  • Ponemon, L. and D. L. Gabhart: 1990, 'Auditor Independence Judgments: A Cognitive-Developmental 226 William E. Shafer et al. Model and Experimental Evidence', Contemporary Accounting Research (Fall): 227–251.

    Google Scholar 

  • Public Oversight Board (POB): 1993, In the Public Interest: A Special Report by the Public Oversight Board of the SEC Practice Section, AICPA. Stamford, CT: POB.

    Google Scholar 

  • Randall, D. M. and M. F. Fernandes: 1991, 'The Social Desirability Bias in Ethics Research', Journal of Business Ethics 10: 805–817.

    Google Scholar 

  • Ratneshwar, S. and D. W. Stewart: 1989, 'Nonresponse in Mail Surveys: An Integrative Review', Applied Marketing Research 29(3): 37–46.

    Google Scholar 

  • Rest, J. R.: 1986, Moral Development: Advances in Research and Theory (Praeger, New York).

    Google Scholar 

  • Salterio, S.: 1996, 'The Effects of Precedents and Client Position on Auditors' Financial Accounting Policy Judgment', Accounting, Organizations and Society 21(5): 467–486.

    Google Scholar 

  • Salterio, S. and L. Koonce: 1997, 'The Persuasiveness of Audit Evidence: The Case of Accounting Policy Decisions', Accounting, Organizations and Society 22(6): 573–587.

    Google Scholar 

  • Sarbanes-Oxley Act of 2002. United States House of Representatives, 107th Congress.

  • Schuetze, W.: 1994, 'A Mountain or a Molehill?', Accounting Horizons 8(1): 69–75.

    Google Scholar 

  • Securities and Exchange Commission (SEC): 1999a, Materiality. SEC Staff Accounting Bulletin No. 99 (Washington, D.C.: U.S. Printing Office).

    Google Scholar 

  • Securities and Exchange Commission (SEC): 1999b, Revenue Recognition. SEC Staff Accounting Bulletin No. 101 (Washington, D.C.: U.S. Printing Office).

    Google Scholar 

  • Shafer, W. E., R. E. Morris and A. A. Ketchand: 1999, 'The Effects of Formal Sanctions on Auditor Independence', Auditing: A Journal of Practice and Theory. 18(Suppl), 85–101.

    Google Scholar 

  • Shockley, R. A.: 1982, 'Perceptions of Auditor Independence: A Conceptual Model', Journal of Accounting, Auditing and Finance 5(2): 126–143.

    Google Scholar 

  • Trevino, L. K., K. D. Butterfield and D. L. McCabe: 1998, 'The Ethical Context in Organizations: Influences on Employee Attitudes and Behaviors', Business Ethics Quarterly 8(3): 447–476.

    Google Scholar 

  • Trompeter, G.: 1994, 'The Effect of Partner Compensation Schemes and Generally Accepted Accounting Principles on Audit Partner Judgment', Auditing: A Journal of Practice and Theory 13(2): 56–68.

    Google Scholar 

  • Weil, J.: 2001, 'Going Concerns: Did Accountants Fail to Flag Problems at Dot-Com Casualties?', Wall Street Journal (February 9): C1–C2.

Download references

Author information

Authors and Affiliations

Authors

Rights and permissions

Reprints and permissions

About this article

Cite this article

Shafer, W.E., Ketchand, A.A. & Morris, R.E. Auditors' Willingness to Advocate Client-Preferred Accounting Principles. Journal of Business Ethics 52, 213–227 (2004). https://doi.org/10.1023/B:BUSI.0000037530.25174.30

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1023/B:BUSI.0000037530.25174.30

Navigation