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Rules vs. principles: the surprising impact of personality on auditor-client interactions.

As the U.S. accounting profession continues its relentless march toward a system of standards based on principles, one business school is adapting its curriculum accordingly and is discovering that personality affects how students approach the audit process in unexpected ways.

At the Sawyer Business School (SBS) of Suffolk University in Boston--where the author is an assistant professor--students enrolled in the "capstone" public accounting course (i.e., the final required accounting course prior to graduation) complete a training exercise that places them in the role of an auditor who needs to discuss a prospective audit adjustment with a client. The case involves a contractual asset that must be assigned a valuation using fair value accounting principles, a topic that is at the forefront of the trend toward principles-based standards. Specifically, each student is asked to define the highest, lowest, and "most reasonable" values that an auditor should establish before initiating discussions with a client. Then, each student engages in a simulated auditor-client interaction.

The initial intent of the exercise was to demonstrate that the variability of these amounts is relatively high under a principles-based system; that is, that a significant degree of uncertainty is inevitable when principles are employed in place of rules. Surprisingly, though, the results of this exercise have revealed that the personality types of auditors noticeably influence their decisions in a principles-based milieu, and that they do so in a counterintuitive manner.

Measuring Personality

Why was personality addressed during the training exercise at all? By fortuitous coincidence, the SBS students were required to complete personality surveys such as the Gregorc Style Delineator (GSD), the Keirsey Temperament Sorter (KTS), and the Myers-Briggs Type Indicator (MBTI) to assist them in developing a stronger "executive presence." The school initially defined the need for "presence training" to support Asian students who were unfamiliar with Western business concepts; it later extended the training to all students during the development of professional networking skill exercises.

According to the GSD's parameters, accountants tend to be concrete and sequential in nature, while individuals in other walks of life tend to be more abstract and random in nature. Most accounting students at SBS declared themselves to be "rules-oriented" people; they tended to score highly on the concrete and sequential scales. A minority of accounting students, however, declared themselves to be "principles-oriented" people; they tended to score highly on the abstract and random scales.

Similarly, according to the KTS's schema, accountants tend to be concrete and cooperative (i.e., respectful of social rules) in nature, while others tend to be more abstract and utilitarian. Accordingly, most accounting students at SBS tended to score highly on the concrete and cooperative scales and were thus categorized as "guardians" under KTS guidelines. However, a minority of accounting students declared themselves to be principles-oriented in nature and were thus categorized as "rationals" instead. These abstract utilitarian personalities tend to ignore rules and follow their own pragmatic instincts.

The MBTT system utilizes a far more complex paradigm and, accordingly, did not produce a clearly defined methodology to differentiate between rules-oriented and principles-oriented accounting students. Nevertheless, individuals who declared themselves to be rules-oriented tended to score highly on the MBTI's thinking and judging scales, whereas those who declared themselves to be principles-oriented tended to score highly on the feeling and perceiving scales.

Unsurprisingly, the students were generally able to self-identify their own personality types; they often classified their personal tendencies in a manner that was consistent with their survey scores. What was surprising, however, was the impact that was generated by their personality types on the results of the auditor-client training exercise.

The Impact of a Rules-Based Orientation

Common sense might predict that rules-oriented personalities would perform better in a rules-oriented accounting system, and principles-oriented personalities would be more effective in a principles-oriented accounting system. In other words, "traditional" auditors who are oriented toward rules might be expected to excel within a traditional, rules-based system, and might thus establish more stringent audit adjustments when discoursing with clients in that milieu. Conversely, more "modern" auditors who are oriented toward principles might be expected to succeed within a modern, principles-based system, and might thus establish more stringent adjustments.

In SBS's capstone class, however, such results were not found. Instead, students with rules-oriented personalities consistently produced agreements with more stringent audit adjustments when playing the roles of auditors in a principles-based milieu.

What would explain these results? The answer to this question is important because the accounting profession may expect to attract more principles-oriented students in the future as it gravitates away from rules-based accounting principles. The risk of audit failures--and the concomitant increase in audit-related liabilities--could be significant if the profession begins to absorb large numbers of auditors who are oriented toward principles and who produce agreements that feature weak audit adjustments.

Cognitive Mapping

Behavioral researchers believe that cognitive processes of judgment and decision making can be mapped through rigorous experimentation; the accounting faculty at SBS is beginning to apply such research activities to its audit discussion exercises. Preliminary evidence has suggested tantalizing details about the nature of these processes.

Namely, it appears that rules-oriented professionals adapt to a principles-oriented system by searching for specific illustrative examples and mentally treating them as ad hoc rules. One student explained, "I try to find a recent case that was treated a certain way; then I make sure that I understand how those accountants made their decision. Even if there is no FASB rule that tells me what to do, there is usually an interpretation--or some transaction that is described in the footnotes of a publicly traded company--that I can use in place of a rule."

Such cognitive processes tend to be followed by individuals with rules-oriented personalities. On the other hand, individuals who are oriented toward principles tend to focus on broad and general guidelines that bring harmony to situations of conflict. Such individuals adapt to the lack of rules in a principles-based system by seeking compromise without anchoring on a central argument of fact. The SBS faculty suspect that such compromises generally lead to weaker audit adjustments.

The View from the Field

John Nicolopoulos, a shareholder at Vitale, Caturano & Company, P.C. (the fifth-largest accounting firm in the Boston region), believes that these conclusions are fundamentally on target. "We see similar trends unfolding as professionals climb the career ladder within our firm and adjust to new roles and responsibilities," he said. "Young professionals tend to be most focused on the rigid application of the rules. As they mature and gain greater comfort with them, they appear to become more flexible in client interactions. However, in the end, the decisions they make are based on the rules they've learned. It will be interesting to see how client discussions change for younger professionals when there are no specific rules to point to."

Nicolopoulos continued: "Even our most seasoned professionals, who often appear the most pragmatic in sensitive client discussions, ultimately anchor their final decisions to the rules. I fully expect that we're all going to need to roll up our sleeves and thoroughly prepare to support the positions we take as auditors if we expect to be able to hold our ground in sensitive discussions with our clients, in a less rigid system."

Kenneth Marshall, the IFRS markets leader for the Americas at Ernst & Young in New York, concurs: "Based on my own global experience, I can see that national cultures play a major role in defining how accounting professionals approach client discussions about audit adjustments. Americans, being oriented toward rules, are often called upon to do the 'heavy lifting' when such discussions become intense," he said. "It is always challenging for a principles-oriented accountant in a principles-based accounting framework to hold his (or her) own under such circumstances. This is exactly why we are dedicating so much time and attention to the transition to IFRS standards."

Paul Ginman, technical director of Baker Tilly International in London (the eighth-largest global accounting network world-wide, including Vitale in the United States), takes a slightly different view of the matter: "In the United Kingdom, our strongest accounting professionals tend to come from nonaccounting backgrounds. We tend to conceptualize the international accounting standards framework as a foundation of principles that support various rules," he said. "One always begins to assess any situation with a principles-based analysis, and one returns to the principles when the rules cannot be directly applied to the issue at hand. A rules-oriented personality may indeed be helpful--most of our professionals can likely be classified that way--and yet our strongest practitioners have learned to analyze rules and principles simultaneously."

It is important to note that Vitale, Ernst & Young, and Baker Tilly have not explicitly incorporated personality surveys into their continuing professional education programs on a firmwide basis. Nevertheless, Nicolopoulos, Marshall, and Ginman agree with the two core observations that were produced by the SBS training exercise, namely that 1) unsurprisingly, accountants do possess personality characteristics that are analogous with rules-oriented or principles-oriented dispositions, and 2) counter-intuitively, perhaps, rules-oriented professionals may indeed be more effective in principles-based environments.


Can principles-oriented individuals be trained to take firmer approaches during audit adjustment and other client discussions? According to the experimental results that have been published by researchers within and outside of the accounting profession, such training initiatives are not necessarily effective. Many researchers agree that personality characteristics tend to be stable over time; thus, a principles-oriented individual may never be perfectly capable of developing "mental rules" and standing firmly by them during discussions with audit clients. Many researchers and audit professionals also agree that a wide array of factors beyond experience and culture--such as gender, education level, and family structure--likewise influence personality styles.

Nevertheless, the accounting faculty at SBS recognize that globalization and the need for regulatory convergence may continue to fuel the trend toward princi ples-based standards for the foreseeable future. With this reality in mind, they are continuing their work in the recognition, definition, and quantification of the impact of personality on auditor-client interactions, and they are continuing to improve the cur riculum to meet the emerging needs of the profession.

Michael Kraten, PhD, CPA, is founder and president of Enterprise Management Corporation, Milford, Conn., and an assistant professor at Suffolk University, Boston, Mass.
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Title Annotation:practice management
Author:Kraten, Michael
Publication:The CPA Journal
Geographic Code:1USA
Date:Apr 1, 2009
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