Firm leaders can improve audit quality by modeling the behavior they say they value, according to a new study performed with the backing of the AICPA Assurance Research Advisory Group.
For example, if firm leaders work 80-hour weeks even though they encourage work/life balance among their employees, audit quality may suffer, according to the research, which is not yet published. The research was performed by:
- Kerri-Ann Sanderson, CPA (inactive), Ph.D., an assistant professor of accounting at Bentley University.
- Veena Brown, CPA, Ph.D., an associate professor of accounting at the University of Wisconsin–Milwaukee.
- Christine Earley, CPA (inactive), Ph.D., a professor of accountancy and department chair at Providence College.
The researchers interviewed 24 firm leaders (mostly partners and managers) across 12 firms and surveyed 123 auditors on their perceptions of their workplace environments.
The following Q&A, edited for brevity and clarity, provides more details on the research.
Why did you focus on tone at the top in the study?
Sanderson: Leadership tone forms the backbone of the firm’s culture and their system of quality control that really undergirds overall audit quality. So at its core, the leadership tone and overall firm culture provides the foundation that influences auditors’ ethical judgments and their decisions. To highlight its importance, tone at the top of public accounting firms is often the focus of standard setters and regulators when they’re developing firm-level standards and when they perform periodic firm inspections. Even though tone at the top is a critical component of quality-control measures, there are very few studies in the literature that actually examine this phenomenon and its effects on the accounting environment, and even fewer studies look outside the Big Four and our larger accounting firms.
How did you define quality in an audit?
Brown: In this study, we captured audit quality in multiple ways. For instance, we asked the participants about dysfunctional behaviors, like eating time and ghost-ticking, as well as whether professional skepticism is promoted at the firm. We also capture whether the firms have consultations on audits and whether employees feel comfortable reporting any ethical issues. We developed a model in our study and in that model we measure audit quality with low levels of quality-threatening behaviors. These include eating time, ghost-ticking, cutting corners, and so forth. We also considered high levels of quality-promoting behaviors like professional skepticism, engaging audit quality consultations, taking time to train or mentor junior auditors, etc. So there were multiple different ways that we attempted to capture audit quality within the study.
What did you learn in the results?
Sanderson: We got some pretty good insights from this study. Leadership priorities included tone at the top as an enabler for collaborative teamwork, facilitating communication among team members, and a willingness to ask for help. Leaders also emphasized meeting client needs as well as promoting ethical behavior and a high-quality work product. While these things were common in the messages firm leadership says they prioritize and emphasize as being important, auditors at lower levels of the organization had varied interpretations of these priorities. Very interestingly, we find that, more than what leadership says, what leadership does is keenly observed and significantly influences personnel behavior on engagements and the general working environment at lower staff levels. So the behavior that leadership models affects how lower-level staff make decisions about factors that they perceive to be important for performance evaluation, helping them cope with budgetary pressures, and engaging in innovative thinking on the audit engagement. With regard to communication, we find a mismatch between firms’ primary modes of communicating ethical and quality-related messages, and those modes of communication that staff at lower levels perceive to be the more effective modes of getting these messages across.
So the folks in lower levels of the firm had quite different ideas of what’s important and what’s not?
Sanderson: The priorities were different. So whereas in some of the higher levels of the organization they’re promoting certain qualities, characteristics, initiatives, or factors as being important, at the lower levels they might not have viewed that priority with the same order.
What effect might your study have on the standards?
Earley: Within each firm we have people at the leader level, at lower levels, and in between at the manager level. So we are looking to see what is the difference between what the leaders are saying and what’s going on down below. We think the knowledge of the best practices as well as the challenges that firms are facing will be helpful to standard setters as they go forward with their quality-control standards.
What are best practices for firm leaders as a result of the study?
Earley: It’s one thing for firm leaders to say they value audit quality or their culture is all about, for example, employees and their well-being. And our results show that employees are very sensitive to the actions and whether these actions are consistent with the messages that they are getting from the firm. For example, if a firm has a policy that emphasizes that their people are the most valuable asset of the firm, and we heard this a lot from our firms, but then they find they focus on profitability over employee well-being, in that case there would be a disconnect. The way this might threaten audit quality is, it can lead to lower morale among firm employees and the tendency to engage in some of these quality-threatening behaviors. Going along with that, we believe that employees who feel invested in furthering the culture and the mission of their organization are intrinsically motivated to do their best work.
What else did you find?
Earley: We have some other results regarding communication as well. It really came down to making sure everyone in the firm feels that firm leadership is actually taking an interest in making sure they understand the information they need. More informal channels of communication are actually equally important as formal channels. People at the lower levels of the firm tend to want to communicate through more informal channels like their peers and immediate supervisors rather than relying on, for example, a firm newsletter or email.
Brown: On the audit there is this documentation culture, right? If it’s not documented, it’s not done. So in the accounting and auditing environment, having these things on paper or in some form of policy is a way that auditors have been using as evidence that a policy exists. I have it in a policy, I have it in a manual, so that means it exists. What we’re finding is that beyond writing these things down in some employee manual that nobody will ever read again, firm leaders need to embody and model the behavior day-to-day. That’s the true mode of communication that we find here. Beyond all the other policies and procedures that they may have, the real learning takes place through the modeling.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.