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The relationship between client advocacy and audit experience: an exploratory analysis.


This paper reports the results of an exploratory study designed to investigate whether auditors assume the role of client advocate. Results indicate that auditors did not automatically assume an advocacy position. However, when client interests were made salient, experienced auditors exhibited behavior consistent with advocacy. These results are discussed in light of the conflicting incentives faced by auditors and recent criticisms that auditors may lack the impartiality necessary to provide reliable audits. Given the exploratory nature of this study, further research appears to be warranted so that a more complete understanding of the auditor's willingness to act as a client advocate may be gained.

Key Words: Client advocacy, Client preferences, Auditor objectivity.

Data Availability: Data used in this analysis may be obtained from the authors.


Recently, the perception within the financial community is that auditors too often assume the role of client advocate, lacking the impartiality necessary to provide a reliable audit. For example, while recalling his experiences at the Securities and Exchange Commission (SEC), former Director of the Division of Enforcement Stanley Sporkin described how clients influenced the preparation of financial statements. Referring to the case of corporate acquisitions, Sporkin (1993, 7) stated:

It was interesting when you would look at

the financial reports of the [selling]

company ... prepared by its own accountants.

And it was also very interesting to

look at the report of the accountant that

was hired by the company ... tak[ing] over

the target. It was night and day! The analyses

were different. And what occurred to

me was, why should there be these differences?

Why should one paint a rosy picture

and the other present a much more

critical picture?

Walter Schuetze, former SEC Chief Accountant, echoed this sentiment by commenting that auditors often behave as "cheerleaders" for their clients, actively supporting positions that have no authoritative basis (Schuetze 1994). Similarly, Michael Sutton, another former Chief Accountant of the SEC has questioned how close the auditor-client relationship can become before "private interests might be placed ahead of those of investors, or that the public will perceive it that way" (Sutton 1997, 89).

While the issue of client advocacy has received considerable attention, extant research has not directly examined whether the perception of auditors as client advocates is justified. Past studies have shown that auditors can be influenced by explicitly stated client preferences; however, the broader issue of client advocacy has not been addressed. Such an investigation is important because client advocacy implies that auditors will be biased toward client interests, even in the absence of explicitly stated preferences.

The remainder of this paper is organized as follows. The second section reviews the client preference literature to provide background for the current study. The third section develops the research questions, while the fourth section details the methodology used to examine these questions. The fifth section presents experimental results. The final section discusses implications of the results, provides limitations and suggests avenues for future research.


Client Advocacy vs. Client Preference

As suggested in the extant literature, client preference effects occur when a client clearly states a desired outcome or accounting treatment and the auditor behaves in a manner consistent with the client's wishes. Client advocacy implies a more subtle form of influence. For purposes of this study, auditors are considered advocates if mere knowledge of the client's best interests is sufficient to impact audit judgments. A client's interests may be inferred through contextual information, through knowledge acquired during the audit, or through discussions with client management. Thus, the primary difference between client preference and client advocacy is whether the client states a desired accounting treatment or the auditor infers the best treatment based on knowledge of the specific client situation.

The following subsection discusses the findings of existing client preference research. While these studies have provided valuable insight into how auditors respond to client influence, they have not provided information as to whether auditors assume an advocacy role on behalf of their clients. (1)

Client Preference Studies

Several studies have illustrated how clients may influence audit judgments. For example, Gramling (1997) investigated whether client preference affects auditors' use of a client's internal audit department. Utilizing an accountability manipulation, she found no evidence that client preference influenced auditors' initial evaluations of the quality of the internal audit department. However, her results did indicate that auditors were more likely to rely on the internal audit department's work when the client stated a preference for a low audit fee.

In contrast to Gramling (1997), other client preference studies have examined how preferences affect judgments regarding specific accounting treatments. Among these studies, Buchman et al. (1996) investigated whether a client's preferred litigation disclosure influenced auditors' recommended disclosures. Results indicated that client preference had no effect. (2) The authors suggested that the absence of a significant preference effect may have been due to a failure in their accountability manipulation which was intended to cause the participants to feel accountable to the client. They argued that if participants did not feel accountable, they may have felt no pressure to perform as the client wished.

Salterio (1996) examined auditors' tendency to be persuaded by clients using both archival and experimental methodologies. Although his experiment failed to demonstrate that clients directly influence audit judgments, the archival data indicated that an indirect influence might exist. Salterio suggested that the absence of a direct client influence in the experimental portion of his study might have been due to the presence of overwhelming precedents that conflicted with the client's preferred accounting treatment.

Salterio and Koonce (1997) extended Salterio (1996) by examining the effects of both consistent and mixed accounting precedents. As in the earlier study, Salterio and Koonce (1997) found that audit judgments were more strongly influenced by consistent precedents than by the client's preferred treatment. However, audit judgments were significantly influenced by client preference when the available precedents were mixed. The authors maintained that these findings are not indicative of an insidious client preference effect; rather, auditors respond to client preferences when GAAP is ambiguous and there is sufficient evidence to favor the client's position.

In an earlier study, Trompeter (1994) also considered whether the level of ambiguity in GAAP moderates the impact of client preference on auditor judgment. Using an experimental methodology, Trompeter designed cases with varying levels of ambiguity. Trompeter (1994) found that audit judgments were more influenced by client preferences when GAAP was ambiguous, thus allowing for more flexibility in its interpretation and application (cf., Roberts and Cargile 1994). This finding is consistent with Salterio and Koonce's (1997) conclusion that auditors will generally support the client's preferred treatment when GAAP does not offer clear guidance.

In sum, two approaches to studying client preference have emerged. One approach has provided auditors with an explicitly stated client preference that conflicted with either auditor preference or GAAP (Gramling 1997; Buchman et al. 1996; Salterio 1996). In essence, an adversarial relationship was created between the auditor and client. These studies reported little or no client preference effect. The second approach mitigated the adversarial relationship by including scenarios without authoritative guidance (Salterio and Koonce 1997; Trompeter 1994). These studies have reported stronger client preference effects.


Conflicting Incentives

The nature of the auditor-client relationship provides an environment in which clients may inappropriately influence auditors' judgments (Bazerman et al. 1997; Hackenbrack and Nelson 1996; Nichols and Price 1976). Auditors often have substantial economic incentives to please their clients (Lochner 1993; Schuetze 1994; Trompeter 1994; Wright and Wright 1997; Braun 1997). Notwithstanding these incentives, auditors are bound by their professional standards and code of ethics to remain objective and impartial. Firms face substantial sanctions (e.g., litigation and loss of reputation) if they inappropriately acquiesce to client demands (Hackenbrack and Nelson 1996).

Recent theoretical work has suggested that, given the conflicting incentives facing the audit profession, auditors cannot remain impartial. For example, Gaa (1997) has described the incompatibility of the two moral roles facing the profession. The first, called the "guardian" role, obligates audit firms to behave as defenders of the public interest. The second, referred to as the "commercial" role, requires firms to compete in the marketplace. Gaa (1997) argues that the audit function is a guardian activity that must be protected from the firm's commercial pressures. Furthermore, he maintains that until such a separation occurs, auditor impartiality is not feasible.

A study by Shah (1996) illustrates the potential impact of the profession' s conflicting moral roles. Shah traced the process of the well-publicized "creative compliance" schemes that occurred in the U.K. between 1987-1990. (3) Based on personal interviews with Big 6 partners, he concluded that audit firms played an integral role in designing complex convertible securities that circumvented best accounting practice. During the course of the interviews, one Big 6 partner admitted taking a "commercial approach" to deciding whether to violate the spirit of accounting principles (Shah 1996, 33). Another stated that "in these difficult times, partners are afraid to lose a client and are under great pressure to compromise" (Shah 1996, 34). In addition, Shah noted that the professionals interviewed had no fear of reprisal from regulators and believed that what they were doing was not ethically wrong.

From a psychological perspective, Bazerman et al. (1997) also argued that the conflicting incentives inherent in the profession may make it impossible for auditors to render impartial judgments. Based on extant psychological research, the authors maintained that auditors' judgments will be unconsciously biased in favor of their clients' interests. They suggested that this bias is the result of several factors including the auditor/client relationship and the possibility of immediate client loss. Furthermore, due to its unconscious nature, the authors claim that neither moral suasion nor the threat of sanction can eliminate this judgmental bias.

Contrary to the conclusions drawn above, Hackenbrack and Nelson (1996) have provided empirical evidence suggesting that the threat of sanction can impact audit judgments. They found that auditors' willingness to support a client's aggressive reporting strategy was related to the level of engagement risk (i.e., risk of fines, litigation and/or loss of reputation). More specifically, their results indicated that auditors preferred aggressive reporting methods when engagement risk was evaluated as moderate, but preferred conservative reporting methods when engagement risk was evaluated as high. They concluded that the threat of sanction can, in fact, encourage auditors to be less aggressive in reporting strategies.

Based on the above discussion, it remains unclear which of the conflicting incentives will most influence auditors' judgments in the absence of an explicitly stated client preference. Therefore, the following research question is proposed:

Q1: Are audit judgments influenced by client interests even in the absence of an explicitly stated client preference?

Experience Effects

As noted above, auditors' tendency to favor client interests may be related to the incentives associated with client retention. A recent study by Tan and Libby (1997) has indicated that tacit managerial knowledge (including client retention and practice development) is considered increasingly important to superior performance evaluations as auditors move from staff to senior to manager. Responses to a survey by Bhamornsiri and Guinn (1991) also indicated that practice development skills are significantly more important at upper levels of the firm. These results suggest that continued advancement in accounting firms requires the ability to develop and maintain positive client relationships. Thus, it is not unreasonable to assume that auditors' tendency to be influenced by client interests may be positively related to experience.

Experimental evidence regarding the relationship between audit experience and client influence is mixed. For example, Farmer et al. (1987) found that experienced auditors were less likely than inexperienced auditors to agree with a client's preferred accounting treatment. Interestingly, the authors concluded that staff auditors tend to be more concerned than partners with retaining and pleasing clients. By contrast, results of Abdolmohammadi and Wright (1987) indicated a negative relationship between audit experience and the likelihood of proposing an audit adjustment or qualified opinion. They suggested that these results reflect experienced auditors' increased awareness of the potential adverse consequences of their audit adjustments.

Again, extant research does not provide a clear indication of the expected relationship between audit experience and the potential for biased judgments. Thus, the second research question asks:

Q2: Is the degree to which client interests influence audit judgments related to audit experience?


To investigate the research questions, an experiment involving a corporate acquisition was developed. Participants examined several pieces of audit evidence related to one line of the target division's inventory and then provided judgments related to that inventory. This setting was selected for several reasons. First, acquisitions are unique in that two parties (a seller and buyer) may request an audit of the same entity. Second, the immediate interests of the buyer and seller are best served by diametrically opposing audit judgments. That is, an inventory write-down would likely result in a lower selling price--an outcome in the best interest of the buyer but not the seller. Third, the setting provides an opportunity to examine whether auditors are influenced by their clients' relative position in an important business transaction. Finally, it provides the opportunity to observe whether acquisition negotiations systematically lead to the preparation of divergent financial statements even though the statements purport to represent the same entity (Sporkin 1993).


Ninety-six certified public accountants participated in the experiment; of these, 43 were from non-national accounting firms and the remaining 53 were from national accounting firms. (4) All participants were currently employed in public accounting and were required to have at least two years of audit experience. (5) Participants' average experience was approximately 11 years. Participants received experimental materials through a contact person within each firm. To maintain the integrity of the study, each contact person was given explicit instructions detailing the required experimental procedures. (6) No violations of the instructions were reported.

Experimental Design

The experiment employed a 2 x 2 between-subjects design with client identity and salience as the manipulated variables. In addition, one measured variable, years of audit experience, was also included. Years of experience rather than experience level (e.g., senior, manager, etc.) was chosen for two reasons. First, sample firms varied in organizational makeup. Consequently, any classification by level would have been subjective. Second, there is no a priori reason to expect auditors to assume a client advocacy position immediately upon promotion.

Participants were randomly assigned to one of two client identity conditions, either long-standing auditor for the seller or buyer within the acquisition scenario. They were informed that as part of the ongoing negotiations, their client had retained them to perform a first-time GAAP audit of the target division's financial statements. The case provided mixed audit evidence related to the possible obsolescence of one significant line of the target division's inventory (see appendix). (7)

The second manipulation related to the salience with which the client's interests were communicated. Specifically, within each of the client identity conditions, participants were randomly assigned to one of two levels of salience: low or high. The low salience condition was included to examine whether auditors are influenced by client interests based solely on contextual information (i.e., knowledge that they represent the buyer or seller in the acquisition transaction). (8) The high salience condition provided more evidence of the client's interests. Specifically, participants were told that their client had expressed concern over the impact that inventory obsolescence might have on their negotiating position. Although participants did not receive instructions from the client regarding what actions they should take, they were told how obsolescence would affect their client's position in the ongoing negotiations. For the seller, the instrument stated that identification of inventory obsolescence would be problematic; for the buyer, unidentified obsolescence would be problematic (see appendix). Participants in the low salience conditions received no such information. This manipulation was intended to communicate that an inventory write-down was not in the best interest of the seller, but was in the best interest of the buyer. (9)

After reading the experimental materials, participants were asked to make a series of judgments using Likert-type scales. The judgments of primary interest were participants' estimated likelihoods regarding inventory obsolescence and the recommendation of an inventory write-down. Upon completion of the experiment, all participants answered a post-test questionnaire that inquired as to their background and experience. (10)


The research questions were analyzed by modeling auditors' obsolescence and write-down likelihood judgments as a function of three variables: (1) experience, (2) client identity (buyer vs. seller) and (3) salience (high vs. low). A fourth variable, firm-type (national vs. non-national), was included in the model to control for possible response differences based on participants' firm size. Table 1, panel A provides descriptive statistics on participants' years of experience while panel B provides statistics on several response variables, including the two primary dependent measures--obsolescence likelihood and write-down likelihood. As shown in panel A, analysis of task-related experience measures revealed no significant differences between firm-types. Specifically, experience with write-downs did not differ across firm type (t = 0.99, p = 0.33). In addition, firm type did not impact experience with acquisition engagements (t = 0.43, p = 0.67) or with representing the buyer (t = 1.21, p = 0.23) or seller (t = 0.34, p = 0.74) in such engagements.
Descriptive Statistics

Panel A: Participant Experience (a)

                                 Firm Type

                         National       Non-National

Client Identity/
Salience           N    Mean   S.D.   N    Mean    S.D.

Buyer/Low          14   7.55   2.59   10   14.62   11.37
Seller/Low         12   7.92   4.40   10   16.73   12.44
Buyer/High         14   8.14   4.46   12   12.54   11.66
Seller/ High       13   9.76   6.74   11   10.92    7.58
  Totals           53   8.33   4.69   43   13.58   10.72

Panel A: Participant Experience (a)


Client Identity/
Salience           N    Mean    S.D.

Buyer/Low          24   10.49   8.19
Seller/Low         22   11.92   9.83
Buyer/High         26   10.17   8.67
Seller/ High       24   10.29   7.00
  Totals           96   10.68   8.35

Panel B: Participant Response Variables

Response Variable (b)     Mean   Median   Deviation   Range

Obsolescence Likelihood    59      65        21       13-100
Write-Down Likelihood      58      60        21        6-100
GAAP Conformance           69      72        23       15-100
Write-Down Importance      75      80        21       10-100
Client Reliance            72      75        19       10-100

(a) Participants' average experience levels are not significantly
different across client identity /salience conditions (p > 0.20).
However, experience levels are significantly different across
firm-type conditions (p < 0.01).

(b) See the appendix for a complete list of response variables.

Table 2 provides Pearson correlations among experimental and response variables. As indicated in the table, the only significant correlation among the experimental variables is between experience and firm-type. In contrast, there are several significant correlations among participants' response variables. This is not unexpected given the natural relationships among the questions posed in the experiment. For example, it is reasonable to expect the relatively high correlation ([rho] = 0.62, p < 0.01) between participants' write-down judgments and their GAAP importance judgments. Having just stated that they would (would not) propose an inventory write-down, it is reasonable to expect that participants would be more (less) likely to judge such a write-down to be important in ensuring that the financial statements conform to GAAP.
Pearson Correlation Matrix
of Experimental and Response Variables

                      Experimental Variables

                    EXP.     IDENTITY   SALIENCE

EXPERIENCE        1.00 ***   0.04       -0.06

IDENTITY                     1.00 ***    0.00

SALIENCE                                 1.00 ***







                     Experimental          Response
                       Variables           Variables

                    FIRM        WRT.        IMPORT.

EXPERIENCE        -0.31 ***    0.00        -0.05

IDENTITY          -0.02        0.06        -0.09

SALIENCE           0.03        0.17         0.08

FIRM               1.00 ***   -0.09         0.10

WRITE-DOWN                     1.00 ***     0.62 ***

GAAP IMPORTANCE                             1.00 ***




                   Participant Response Variables

                  NEGOTIATION    CLIENT
                    IMPORT.     RELIANCE     OBSOL.

EXPERIENCE          0.17        -0.14       -0.04

IDENTITY            0.14        -0.12       -0.03

SALIENCE           -0.02        -0.01        0.12

FIRM               -0.02        -0.07        0.13

WRITE-DOWN          0.28 ***     0.28 ***    0.50 ***

GAAP IMPORTANCE     0.50 ***     0.27 ***    0.50 ***

IMPORTANCE          1.00 ***     0.17        0.34 ***

RELIANCE                         1.00 ***    0.12

OBSOLESCENCE                                 1.00 ***

*** Significant at the 0.01 level.


As an initial data analysis step, full OLS regression models were computed for obsolescence and write-down judgments. (11) The obsolescence judgment model was not significant at conventional levels and was therefore not pursued. However, the write-down judgment model was significant (F = 5.71, p = 0.02). (12) For parsimony, this model was reduced through the technique recommended by Applebaum and Cramer (1974), Green (1978, 134) and Pedhazur (1982, 375). (13) Consistent with the exploratory nature of the research, the decision was made a priori to include all terms significant at levels of less than 0.10 (cf., Marden et al. 1997). The final reduced model is as follows:

WRT = [[alpha].sub.0] + [[alpha].sub.1] EXP + [[alpha].sub.2] IDENTITY + [[alpha].sub.3]

SALIENCE + [[alpha].sub.4] + [[alpha].sub.5] (EXP x IDENTITY) + [[alpha].sub.6] (EXP x SALIENCE)

+ [[alpha].sub.7] (EXP x FIRM)+ [[alpha].sub.8] (IDENTITY x SALIENCE)

+ [[alpha].sub.9] (SALIENCE x FIRM)+ [[alpha].sub.10] (EXP x IDENTITY x SALIENCE)

+ [[alpha].sub.11] (EXP x SALIENCE x FIRM) + [epsilon]


WRT = likelihood of an inventory write-down

EXP = years of audit experience

IDENTITY = client identity: (0) Buyer (1) Seller

SALIENCE = salience level: (0) High (1) Low

FIRM = firm type: (0) Non-national (1) National.

The reduced model (F=2.50, p < 0.01) is presented in table 3. (14) In the model, the intercept ([[alpha].sub.0]) and slope ([[alpha].sub.1]) coefficients define the relationship between participants' write-down likelihood judgments (WRT) and their experience (EXP) where IDENTITY = buyer, SALIENCE = high, and FIRM = non-national. Each of the other parameters ([[alpha].sub.2] through [[alpha].sub.11]) then adjusts the relationship for alternative experimental conditions. For example, the adjusted intercept where IDENTITY = seller, SALIENCE = low, and FIRM = national is ([[alpha].sub.0] + [[alpha].sub.2] + [[alpha].sub.3] + [[alpha].sub.4] + [[alpha].sub.8] + [[alpha].sub.9]), or (44.33+27.61+38.976.16-38.99-3.76) = 62.00 and the adjusted slope coefficient is ([[alpha].sub.1] + [[alpha].sub.5] + [[alpha].sub.6] + [[alpha].sub.7] + [[alpha].sub.10] + [[alpha].sub.11]), or (0.51-2.34-1.47+1.49+3.36-2.70) =-1.15. The adjusted coefficients for the eight experimental conditions are presented in table 4.
Reduced Model of Auditors' Write-Down Judgments (a)

WRT = [[alpha].sub.0] + [[alpha].sub.1] EXP + [[alpha].sub.2]
IDENTITY + [[alpha].sub.3] SALIENCE + [[alpha].sub.4] FIRM
+ [[alpha].sub.5] (EXP x IDENTITY) + [[alpha].sub.6] (EXP
x SALIENCE) + [[alpha].sub.7] (EXP x FIRM) + [[alpha].sub.8]
(IDENTITY x SALIENCE) + [[alpha].sub.9] SALIENCE x FIRM)
+ [[alpha].sub.10] (EXP x IDENTITY x SALIENCE) +
[[alpha].sub.11] (EXP x SALIENCE x FIRM)

Parameter (b)                                  Coefficient

[[alpha].sub.0] (Intercept)                       44.33
[[alpha].sub.1] (EXP)                              0.51
[[alpha].sub.2] (IDENTITY)                        27.61
[[alpha].sub.3] (SALIENCE)                        38.97
[[alpha].sub.4] (FIRM)                            -6.16
[[alpha].sub.5] (EXP x IDENTITY)                  -2.34
[[alpha].sub.6] (EXP x SALIENCE)                  -1.47
[[alpha].sub.7] (EXP x FIRM)                       1.49
[[alpha].sub.8] (IDENTITY x SALIENCE)            -38.99
[[alpha].sub.9] (SALIENCE x FIRM)                 -3.76
[[alpha].sub.10] (EXP x IDENTITY x SALIENCE)       3.36
[[alpha].sub.11] (EXP x SALIENCE x FIRM)          -2.70

Parameter (b)                                  t-statistic

[[alpha].sub.0] (Intercept)                      5.96 ***
[[alpha].sub.1] (EXP)                            1.06
[[alpha].sub.2] (IDENTITY)                       2.87 ***
[[alpha].sub.3] (SALIENCE)                       3.38 ***
[[alpha].sub.4] (FIRM)                          -0.61
[[alpha].sub.5] (EXP x IDENTITY)                -2.96 ***
[[alpha].sub.6] (EXP x SALIENCE)                -2.04 **
[[alpha].sub.7] (EXP x FIRM)                     1.72
[[alpha].sub.8] (IDENTITY x SALIENCE)           -2.91 ***
[[alpha].sub.9] (SALIENCE x FIRM)               -0.24
[[alpha].sub.10] (EXP x IDENTITY x SALIENCE)     3.26 ***
[[alpha].sub.11] (EXP x SALIENCE x FIRM)        -1.83

*, **, *** Significant at the 0.10, 0.05 and 0.01 level for a
two-tailed t-test, respectively.

(a) Model reduced through the technique recommended by Applebaum
and Cramer (1974), Green (1978, 134), and Pedhazur (1982, 375).
Overall model significant at p < 0.01 (F= 2.50, N = 96, Adjusted
[R.sup.2] = 0.25).

(b) WRT = likelihood of an inventory write-down
EXP = years of audit experience
IDENTITY = client identity: (0) Buyer (1) Seller
SALIENCE = salience level: (0) High (1) Low
    FIRM = firm type: (0) Non-national (1) National
Relationship Among Write-Down Judgments, Experience, Client
Identity and Salience

                           National Firms

Salience                       Effect

Intercept      ([[alpha].sub.0] + [[alpha].sub.3] +
               [[alpha].sub.4] + [[alpha].sub.9]) (b)
Slope          ([[alpha].sub.1] + [[alpha].sub.6] +
                 [[alpha].sub.7] + [[alpha].sub.11)

Intercept      ([[alpha].sub.0] + [[alpha].sub.2] +
                [[alpha].sub.3] + [[alpha].sub.4] +
                 [[alpha].sub.8] + [[alpha].sub.9])
Slope          ([[alpha].sub.1] + [[alpha].sub.5] +
                [[alpha].sub.6] + [[alpha].sub.7] +
                [[alpha].sub.10]] + [[alpha].sub.11]

Intercept       ([[alpha].sub.0] + [[alpha].sub.4])
Slope           ([[alpha].sub.1] + [[alpha].sub.7])

Intercept      ([[alpha].sub.0] + ([[alpha].sub.2] +
Slope           ([[alpha].sub.1] +[[alpha].sub.5] +

                     National Firms

Identity/       Adjusted     t-statistic
Salience       Coefficient       (a)

Intercept         73.38         6.83 ***
Slope             -2.17        -1.79 *

Intercept         62.00          5.90 ***
Slope             -1.15         -1.00

Intercept         38.17          4.34 ***
Slope              2.00          2.32 **

Intercept         65.78          7.68 ***
Slope             -0.34         -0.46

                        Non-National Firms

Salience                      Effect

Intercept      ([[alpha].sub.0] + [[alpha].sub.3])
Slope          ([[alpha].sub.1] + [[alpha].sub.6])

Intercept      ([[alpha].sub.0] + [[alpha].sub.2] +
                [[alpha].sub.3] + [[alpha].sub.8])
Slope          ([[alpha].sub.1] + [[alpha].sub.5] +
               [[alpha].sub.6] + [[alpha].sub.10])

Intercept               ([[alpha].sub.0])
Slope                   ([[alpha].sub.1])

Intercept      ([[alpha].sub.0] + [[alpha].sub.2])
Slope          ([[alpha].sub.1] + [[alpha].sub.5])

                   Non-National Firms

Identity/       Adjusted     t-statistic
Salience       Coefficient       (a)

Intercept         83.30         9.45 ***
Slope             -0.96        -1.79 *

Intercept         71.92         8.17 ***
Slope              0.06         0.13

Intercept         44.33         5.96 ***
Slope              0.51         1.06

Intercept         71.94         7.99 ***
Slope             -1.83        -2.55 ***

*, **, *** Significant at the 0.10, 0.05 and 0.01 level for a
two-tailed t-test, respectively.

(a) A two-tailed t-test is used to determine whether the
intercept/slope coefficients are different from zero, where
coefficients are adjusted for the specified conditions.

(b) Intercept indicates participants' assessments of the
likelihood of a write-down (WRT) recommendation at two years of
experience. Slope indicates the change in this assessment per
year of experience. See table 3 for the overall model
specification and coefficient definitions.

Primary Analysis

Buyer vs. Seller

To analyze the first research question, the contrasts between the buyer and seller were examined for both salience conditions (see table 5, panel A). In the low salience condition, neither the intercepts nor the slopes are significantly different across identity conditions. (15) These results indicate that client identity did not influence participants' write-down judgments when client interests were not made salient. However, when client interests were made salient there was a significant disordinal interaction between client identity and experience. (16) Specifically, the intercept is significantly lower in the buyer condition than in the seller condition (t = -2.87, p < 0.01). Figure 1 presents these results graphically. Inexperienced participants in the buyer condition were less likely to recommend a write-down than inexperienced participants in the seller condition. To the extent that the manipulation was interpreted as intended, this finding suggests that inexperienced participants may exhibit a contrary reaction to client interests when those interests are made salient. (17)

Decomposition of (IDENTITY x SALIENCE) and (EXPERIENCE x

Panel A: By Salience

Contrast                          Difference   t-statistic

Buyer vs. Seller--High Salience     -27.61      -2.87 ***
Buyer vs. Seller--Low Salience       11.38       1.22
  Difference (a)                    -38.99

Buyer vs. Seller--High Salience      2.34        2.96 ***
Buyer vs. Seller--Low Salience      -1.02        1.55
  Difference (b)                     3.36

Panel B: By Client Identity

                                     National Firms

Contrast                        Difference   t-statistic

High vs. Low Salience--Buyer      -35.21      -2.54 ***
High vs. Low Salience--Seller       3.78       0.28
  Difference (a)                  -38.99

High vs. Low Salience--Buyer        4.17       2.80 ***
High vs. Low Salience--Seller       0.81       0.59
  Difference (b)                    3.36

                                   Non-National Firms

Contrast                        Difference   t-statistic

High vs. Low Salience--Buyer      -38.97      -3.38 ***
High vs. Low Salience--Seller       0.02       0.00
  Difference (a)                  -38.99

High vs. Low Salience--Buyer        1.47       2.04 **
High vs. Low Salience--Seller      -1.89       2.19 **
  Difference (b)                    3.36

*, **, *** Significant at the 0.10, 0.05 and 0.01 level for a
two-tailed t-test, respectively.

(a) Difference is equal to [[alpha].sub.8] in table 3.

(b) Difference is equal to [[alpha].sub.10] in table 3.

While the difference in intercepts may suggest that inexperienced auditors did not act in their client's best interests, the positive difference in slopes across conditions indicates that with experience, participants' judgments become more consistent with client interests. More specifically, the slope under the buyer condition is significantly more positive than under the seller condition (t = 2.96, p < 0.01). This difference indicates that when salience was high, experience moderated how client interests affected participants' write-down judgments. Further, it suggests that with experience, participants' write-down judgments tended to increasingly reflect the interests of their client.

High vs. Low Salience

Together, the above findings suggest that as experience increases, participants' judgments tended to support client interests when those interests were made salient. The observed interactions among client identity, salience and experience may be related to one or both of the client identity conditions. In other words, it is possible that the level of salience impacted participants' responses in the buyer condition. Alternatively, level of salience may have affected responses in the seller conditions. Finally, participants may have responded differently in both the buyer and seller conditions. To determine which of these alternatives best explains the results, contrasts across salience conditions within each of the client identity conditions were performed. Given the difference in results between low and high salience conditions, it is expected that within the buyer (seller) condition, the intercept should be lower (higher) and the slope should be higher (lower) when client interests are made salient.

The contrasts of interest are presented in table 5, panel B. For national firm participants, the contrast between salience levels within the buyer condition is significant for both the intercept and slope. More specifically, the intercept is lower (t = -2.54, p < 0.01) and the slope more positive (t = 2.80, p < 0.01) when salience is high. For the seller condition, however, there is no significant difference between salience conditions for national firm participants. However, given the small sample size, the statistical tests may not be of sufficient power to detect such an effect. Thus, for national firm participants, the difference in results can be attributed to differences in salience in the buyer condition.

The contrast analysis for the non-national participants reveals that within the buyer condition, the intercept is lower (t = -3.38, p < 0.01) and the slope more positive (t = 2.04, p < 0.05) when salience is high. Within the seller condition, the contrast indicates that the intercept is not different, but the slope is significantly more negative (t =-2.19, p < 0.05) for the high salience condition. Thus, these contrasts indicate that for non-national participants both client identity conditions contribute to the change in significance across salience conditions.


This study examined the perception that auditors act as client advocates (e.g., Schuetze 1994; Sporkin 1993). Results suggest that auditors did not automatically assume an advocacy position; that is, their judgments did not necessarily reflect client interests based only on situational or contextual information (i.e., client identity). However, when provided with specific information about the client's position, a somewhat complex pattern of advocacy was observed. First, audit judgments varied with years of audit experience. Specifically, a positive relationship emerged between years of audit experience and auditors' tendency to support client interests. In the buyer condition, experienced auditors were more likely to recommend an inventory write-down than were their inexperienced counterparts. In the seller condition, however, experienced auditors were less likely to recommend an inventory write-down than were inexperienced auditors.

In addition, firm type influenced the client identity by experience interaction. For auditors employed by national firms, experience significantly increased the likelihood of a write-down recommendation in the buyer condition. In the seller condition, however, the impact of experience was not significant. For auditors employed by non-national firms, experience significantly decreased the likelihood of a write-down recommendation in the seller condition, but did not significantly increase write-down recommendations in the buyer condition. The nature of the firm effect is interesting in light of the conflicting incentives inherent in the experimental setting. The seller would immediately benefit from a high selling price; however, failure to write-down overstated inventory could result in future litigation for both the seller and the audit firm. Despite the potential for reprisal, the immediate interests of the seller were reflected in judgments made by experienced auditors employed by non-national firms. The seller's immediate interests did not significantly impact judgments made by national firm auditors.

In the buyer condition, however, judgments made by national firm auditors were more strongly influenced by client interests than judgments made by non-national firm auditors. This pattern of results may reflect differential loss functions across firm type. As discussed in DeAngelo (1981) and Moizer (1985), larger firms have "more to lose" than smaller firms. Also, smaller firms derive a large proportion of revenues from a few, select clients while larger firms have broader, more diverse client bases. This conclusion is consistent with the behavior exhibited by both firm types. Judgments made by national firm auditors were conservative for both clients--recommending a write-down to the buyer, while not accepting the seller's interests of not writing down the inventory. In contrast, judgments made by nonnational firm auditors were more aggressive. Thus, the observed difference in firm type may be due to non-national auditors' sensitivity to client retention and national auditors' sensitivity to possible future losses (e.g., litigation and loss of reputation).

This study is subject to several limitations. First, participants were asked to provide likelihood judgments; no action was required. As noted by Einhorn and Hogarth (1981), judgment is not necessarily synonymous with choice. In addition, judgments were made based on information provided for a fictitious company; thus, participants faced no real risk of future losses. Also, participants developed judgments using a limited amount of evidence. Clearly, an actual inventory adjustment decision would be made in a substantially richer contextual environment. Finally, results are based on a single judgment task and a small sample of the overall auditor population. Due to these limitations, additional research is necessary before any generalizations or recommendations are possible.

Given the results found in this study and recent criticisms by the investing public (e.g., Sporkin 1993; Scheutze 1994), the need for further investigation into client advocacy is warranted. The exploratory nature of the present study provides a number of interesting avenues for future research. For example, formal hypotheses could be developed to provide more rigorous tests of the marginally significant firm-type effects observed in this study. Additionally, researchers could examine whether advocacy extends beyond audit judgments to audit decisions. Finally, ways to mitigate the tendency to act as client advocates could be investigated. Since structural change within the audit profession is not likely in the near future, research should focus on eliminating or reducing advocacy biases within individual auditors or audit teams.


The "Background" information presented below is the case material that was presented to those participants assigned to the seller condition. For those in the buyer condition, the only distinctions are the identification of the buyer as the client and other appropriate formatting changes.



StyleRite Corporation is a large, diversified apparel manufacturer that has been in existence for approximately twenty years. Your firm has been StyleRite's auditor since 1988.

StyleRite is currently negotiating the sale of one of its divisions, PlayTime, to one of the oldest and largest fabric manufacturers in the nation, FabTex Corporation. PlayTime is a mid-sized manufacturer of children's apparel and has been a principal customer of FabTex for several years. During PlayTime's ten-year existence, it has developed a significant presence in the children's apparel market.

As part of the ongoing negotiations, your client--StyleRite--has requested that you perform a full scope audit in accordance with GAAP on the current-year financial statements of the PlayTime division. Given that it is a division of StyleRite, PlayTime's financial statements have never been subjected to an external audit.

Audit Results

While performing the audit of PlayTime, analytical review procedures indicate that over the past year, the division's inventory levels increased 20 percent. During the same time period, gross profit declined by |0 percent. Inventory represents 40 percent of total assets. Based on this information and results of early substantive tests, you become concerned that an obsolescence problem may exist for one particular line of inventory. Accordingly, you perform further substantive tests on this inventory line. The additional tests reveal the following:

1. The line of inventory in question comprises a significant portion of tutal inventory.

2. The gross profit for this line of inventory is approximately the same as last year.

3. Recently, one of PlayTime's competitors introduced a similar, but lower priced product line.

4. PlayTime's inventory turnover ratio has declined from a historical average of 4.0 to approximately 3.0 in the current year.

5. A substantial portion of PlayTime's advertising budget is dedicated to this product line.



You inform StyleRite of the above findings and, in the ensuing discussion, management expresses concern that an inventory obsolescence problem within this significant product line would adversely affect the company' s position in the ongoing negotiations with FabTex.


You inform FabTex of the above findings and, in the ensuing discussion, management expresses concern that an overstatement of inventory within this significant product line would adversely affect the company's position in the ongoing negotiations with StyleRite


Participants were asked to make a series of judgments, including the following judgments that were the primary focus of the study:

1. On the following scale, place an "X" in the location corresponding to your estimate that an inventory obsolescence problem exists for the product line discussed in the case.


2. On the following scale, place an "X" in the location corresponding to the likelihood that you would propose an inventory write-down to your client.


Additional Judgments

In addition, participants were asked to make other judgments as follows:

3. On the following scale, place an "X" in the location corresponding to your estimate of how important an inventory write-down is to making PlayTime's financial statements conform with GAAP.


4. On the following scale, place an "X" in the location corresponding to your estimate of how important recording an inventory write-down is to the ongoing negotiations between StyleRite and FabTex.


5. On the following scale, place an "X" in the location corresponding to the reliance that you believe your client should place on the GAAP financial statements for purposes of buying (selling) PlayTime.


We thank Sunita Ahlawat, Audrey Gramling, Jordan Lowe, Jim Yardley and participants at the 1997 Mid-Atlantic AAA Meeting for helpful comments. We would also like to thank Tom Buchman far his guidance in developing the experimental materials.


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(1) However, see Johnson (1993) for an analogous client advocacy study in the tax domain.

(2) In an earlier study, Jiambalvo and Wilner (1985) manipulated a client's preferred litigation disclosure as part of a study of auditors' contingency evaluations. Their study also failed to identify a significant client preference effect.

(3) A full account of "creative compliance" schemes in the U.K. can be found in Smith (1992).

(4) Numerous firms were represented in the non-national group. Four of the Big 6 and one other national firm were represented in the national group. The distinction between national and non-national firms rather than Big 6 vs. non-Big 6 was made a priori because the national, non-Big 6 firm was more similar to the Big 6 than to the non-national firms. However, data collected did not allow empirical tests to ensure that the national, non-Big 6 firm was more similar to the Big 6 than to the smaller firms.

(5) Discussions with practicing auditors indicated that a minimum of two years of experience was appropriate for the experimental task.

(6) Each firm's contact person received a package that contained the experimental materials and a letter that outlined the procedures to be followed in administering the experiment. The contact person was instructed to distribute the materials to only those auditors with at least two years of audit experience. Further, the contact person requested that participants not discuss the case with other employees or to refer to any firm manuals or other reference materials. Finally, participants were instructed to return the experimental materials to the contact person upon completion. Comparison of control numbers to actual packets received indicated that all materials sent were returned.

(7) The inventory-related cues were adapted from Johnson and Kaplan (1991).

(8) This type of client advocate corresponds to the tax preparer who is a priori expected to serve the taxpayer's interest by legally minimizing any tax liability (Johnson 1993).

(9) Using practicing senior managers and partners, pilot tests were conducted to ensure that the experimental manipulations were perceived as intended. These results indicated that experienced auditors understood the experimental materials. However, our pilot tests did not include less experienced auditors and therefore it is possible that such individuals may have misinterpreted this manipulation.

(10) The questionnaire also included manipulation checks to determine whether participants understood their role in the experiment. Only one participant could not correctly identify their client. Elimination of this participant from the primary data analysis did not alter the results.

(11) Multiple regression was used rather than ANOVA or ANCOVA because the interaction of interest included both categorical and continuous variables (Pedhazur 1982. 328).

(12) Following the suggestion of a reviewer, supplementary analyses were performed in which obsolescence judgments were included as a covariate in the model of write-down judgments. This procedure did not alter the results. In addition, three analyses were performed in which participants' judgments with respect to GAAP importance, negotiation importance, and the degree of reliance were controlled (see appendix). No qualitative difference in results occurred.

(13) The model reduction technique used does not allow for the elimination of either a non-significant main effect or lower-order interaction if the term is included in a significant higher-order interaction. As a result, the reduced model reported in table 3 includes two non-significant main effects (i.e.. EXP and FIRM) and one nonsignificant interaction (i.e., SALIENCE x FIRM).

(14) No underlying assumptions (e.g., normality, homogeneity of variance, multicollinearity) of the OLS regression model were violated.

(15) The contrast does not depend on firm-type (FIRM) because in the full model both the (IDENTITY x FIRM) and the (EXP x IDENTITY x FIRM) interactions were insignificant and were consequently removed through the previously mentioned model reduction method.

(16) The contrast intercepts in the high salience condition are defined by the coefficient on IDENTITY ([[alpha].sub.2]) in equation (1). For the slope, the difference is defined by the coefficient on the EXP x IDENTITY interaction ([[alpha].sub.5]).

(17) An alternative explanation is that these participants misinterpreted the Bayer/High Salience condition to mean that it would not be in the client's best interest to find any adjustments to inventory. If this is true, then write-down judgments made by inexperienced participants in this condition were consistent rather than inconsistent with the client's best interests and it is erroneous to conclude that these individuals were behaving in a contrary fashion.

Christine M. Haynes is a visiting Assistant Professor at the University of Florida; J. Gregory Jenkins is an Assistant Professor at North Carolina State University and Stacey R. Nutt is with Vestek Systems in San Francisco, California.
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Author:Haynes, Christine M.; Jenkins, J. Gregory; Nutt, Stacey R.
Publication:Auditing: A Journal of Practice & Theory
Date:Sep 22, 1998
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