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The Effects of Satisfaction with a Client’s Management During a Prior Audit Engagement, Trust, and Moral Reasoning on Auditors’ Perceived Risk of Management Fraud

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Abstract

The recent accounting scandals have raised concerns regarding the closeness of auditor–client relationships. Critics argue that as the relationship lengthens a bond develops and auditors’ professional skepticism may be replaced with trust. However, Statement on Auditing Standards No. 99 states that auditors “should conduct the engagement with a mindset that recognizes the possibility that a material misstatement due to fraud could be present, regardless of any past experience with the entity and regardless of the auditor’s belief about management’s honesty and integrity” (AICPA 2002, Statement on Auditing Standards No. 99, paragraph 13, p. 10). The purpose of this study is to investigate whether auditors develop trust in a client’s management and whether this trust affects auditors’ decisions. Specifically, this study examines whether auditors’ satisfaction with a client’s management during a prior audit engagement affects auditors’ self-reported trust in that client’s management and whether that trust affects their fraud risk assessment. The decision to trust a client’s management should be an ethical decision because excessive trust may impair auditors’ skepticism, which auditors are required to maintain by their professional responsibilities. We therefore also investigate whether auditors’ trust is affected by their moral reasoning. An experimental case was completed by 89 professional auditors, all with experience assessing the risk of fraud. The results suggest auditors’ satisfaction with the client affects their trust in the client (higher satisfaction associated with higher trust and lower satisfaction associated with lower trust). Further, after an overall unsatisfying experience, auditors’ trust affects their fraud risk assessments. However, after an overall satisfying experience, their trust does not affect their fraud risk assessments. The results indicate auditors are able to maintain their professional skepticism after satisfying past experiences with the client regardless of their beliefs about the honesty and trustworthiness of the client’s management. Lastly, auditors’ moral reasoning was not related to their trust in the client’s management.

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Abbreviations

AICPA:

American Institute of Certified Public Accountants

CFI:

comparative fit index

CPA:

Certified Public Accountants

DIT:

Defining Issues Test

PCAOB:

Public Company Accounting Oversight Board

RMSEA:

root mean square error of approximation

SAS:

Statement on Auditing Standards

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Authors and Affiliations

  1. Department of Accountancy and Business Law, University of North Carolina Wilmington, Cameron Hall – Suite 230, 601 South College Road, Wilmington, NC, 28403-5901, U.S.A.

    William A. Kerler III (McGladrey Faculty Fellow)

  2. Department of Accounting and Information Systems, Virginia Tech, 3007 Pamplin Hall, Blacksburg, VA, 24061, U.S.A.

    Larry N. Killough (KPMG Professor)

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  1. William A. Kerler III
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  2. Larry N. Killough
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Correspondence to William A. Kerler III.

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Kerler, W.A., Killough, L.N. The Effects of Satisfaction with a Client’s Management During a Prior Audit Engagement, Trust, and Moral Reasoning on Auditors’ Perceived Risk of Management Fraud. J Bus Ethics 85, 109–136 (2009). https://doi.org/10.1007/s10551-008-9752-x

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