محیط شکایت های قانونی و تصمیمات حسابرسان برای پذیرش گزارش دهی پرخاشگرانه مشتریان

This study contributes to accounting and auditing literature by addressing two empirical questions: (1) whether litigation environment affects auditors’ decisions to accept clients’ aggressive reporting and (2) whether litigation environment, client business risk, and client retention pressure interact and jointly affect auditors’ decisions to go along with clients’ preferred accounting choices. Fifty-nine (59) US and sixty-one (61) Hong Kong auditors employed by the Big-4 accounting firms participated in this study. The result shows that litigation environment has a significant effect on auditors’ decisions. Auditors who practice in more litigious environments tend to be less willing to go along with clients’ aggressive reporting than those who practice in less litigious environments. This study also confirms that there is a significant interactive effect between litigation environment, client business risk, and client retention pressure on auditors’ decisions to accept clients’ aggressive reporting choices. Implications of the empirical findings for policymakers, standard-setting organizations, and international accounting firms, as well as directions for future studies, are discussed.

The impacts of public policy on the accounting profession through the enactment of laws and regulations have been well-documented and can be traced back to the 1930s.2 Among those policies enforced, the Sarbanes-Oxley Act (SOX) probably has had the most far-reaching effect on public accounting firms and auditors. As DeFond and Francis (2005) stated, the passage of SOX provided a strong indication that policymakers, regulators, and market participants have recognized the crucial role of auditing in US capital markets. According to SOX, US or foreign public accounting firms3 that issue or furnish evidence to be part of audit reports related to US public companies are required to register with the Public Company Accounting Oversight Board (PCAOB). All registered public accounting firms are to be treated the same way as firms organized and operating under US laws, regardless of their geographic locations or the jurisdictions of audit practices. If they violate SOX, registered public accounting firms are subject to the same legal, regulatory and economic consequences. Unlike for previously-enacted laws and regulations, US policymakers have deliberately broadened the coverage of SOX to accounting firms and auditors practicing outside of US jurisdictions. There are two primary reasons for this extension. One is that many US multinational enterprises (MNEs) have rapidly expanded businesses into global markets. Such expansions allow MNEs to generate a significant percentage of their revenues from overseas operations.4 Since the global business trend is expected to continue, managing partners of MNE engagements, typically from US offices, have to rely on procedures conducted and evidence collected by auditors employed by accounting firms in foreign countries. Therefore, the quality of audit judgments made by professionals practicing in foreign jurisdictions could, in turn, affect the quality of US MNEs’ financial statements. Because of this dependency, US accounting firms and managing partners of audit engagements could expose themselves to legal and economic consequences under SOX, if audit judgments made by foreign professionals turn out to be substandard. To address this concern proactively, executives of US accounting firms and managing partners of MNE engagements must understand what factors, and to what extent these factors, may affect foreign auditors’ professional judgments. The other reason for expanding the coverage of SOX to auditors who practice in foreign jurisdictions is that many foreign companies have chosen to list their American Depository Receipts (ADR) in US capital markets.5 Since these companies are headquartered in foreign countries, their financial statements are, and will continue to be, audited by auditors who practice outside of US jurisdiction. To ensure the quality of financial statements filed by these foreign firms with the Securities and Exchange Commission (SEC) and used by US stakeholders, it is essential for US policymakers and regulators to understand whether certain jurisdiction-specific factors may cause foreign auditors to reach different audit decisions than are reached by their US counterparts based on the exact same audit scenario. Such an understanding would allow policymakers and regulators in the US to take action proactively to protect stakeholders of foreign companies listed in US exchanges. Since SOX has reshaped the landscape of US and international accounting practices, DeFond and Francis (2005) indicate that it is important to conduct cross-country audit research because it creates a setting for researchers to investigate the effect of institutional arrangements on audit judgments. In this study, we invited US and Hong Kong auditors to participate in the experiment because they represent professionals who practice in two jurisdictions with distinctive litigation environments. A comparison of decisions made by auditors employed in the US and in Hong Kong allows us to control several important institutional factors, such as legal systems/origins, shareholder rights, financial reporting practices, participants’ educational background, and type of professional training that may affect auditors’ judgments. Similar to prior studies, a client’s aggressive reporting is defined as a reporting method, adopted by the client and accepted by the auditor that portrays the client’s financial conditions more favorably than the facts would support (Hackenbrack and Nelson, 1996, Phillips, 1999, Chang and Hwang, 2003 and Kadous et al., 2003). Since significant professional judgment is involved in evaluating a client’s accounting choices, auditors may find it difficult to reject a client’s preferred reporting practice if that practice is not in direct violation of the Generally Accepted Accounting Principles (Trompeter, 1994, Kennedy et al., 1997, Nelson et al., 2002, Johnstone et al., 2002 and Kadous et al., 2003). As documented in the literature (Hackenbrack and Nelson, 1996 and Chang and Hwang, 2003), client business risk may discourage auditors from accepting clients’ preferred accounting methods. Client retention pressure, however, may provide incentives for auditors to go along with clients’ preference to report more favorable earnings in their financial statements (Lord, 1992, Lee and Gu, 1998, Zhang, 1999, Myers et al., 2003 and Shafer et al., 2004). Furthermore, Zhang (1999) argues that the likelihood of an auditor making a decision in favor of a client could be contingent upon the probability of lawsuits against auditors in case of audit failures. Since the probability of lawsuit varies among jurisdictions, this study investigates the following two issues: (1) whether the litigation environment of accounting practice would affect auditors’ decisions to go along with clients’ aggressive reporting and (2) whether litigation environment, client business risk, and client retention pressure interact and jointly affect auditors’ decisions to go along with clients’ preferred accounting choices. Fifty-nine (59) US and sixty-one (61) Hong Kong auditors from the Big-4 accounting firms participated in this study. The empirical evidence of this study reveals that litigation environment has a significant effect on auditors’ decisions. Auditors practicing in a more litigious environment (i.e., US) are less inclined to accept clients’ aggressive reporting choices. On the other hand, auditors practicing in a less litigious environment (i.e., Hong Kong) are more willing to go along with clients’ aggressive reporting choices. Consistent with our hypothesis, this study also reports a significant interactive effect between litigation environment, client business risk, and client retention pressure on auditors’ decisions to accept clients’ aggressive reporting choices. The remainder of this paper proceeds as follows. The next section offers a literature review and develops the research hypotheses. The research methodology is discussed in Section 3. Section 4 presents the empirical results. Finally, in Section 5, we conclude the study by highlighting the major implications of this study to policymakers, standard-setting organizations, and major accounting firms. Limitations of the study and directions for future research are also discussed.

In this study, we investigated the following two issues: (1) whether the litigation environment surrounding an audit practice affects auditors’ decisions to accept clients’ aggressive reporting and (2) whether litigation environment, client business risk, and client retention pressure interact and jointly affect auditors’ decisions to go along with clients’ preferred accounting treatments. Based on decisions made by Big-4 auditors employed in the US and Hong Kong, there are two major findings reported in this study. First, the litigation environment affects auditors’ willingness to accept client aggressive reporting. Specifically, US auditors, who practice in a highly litigious environment, are more conservative and less inclined to accept clients’ aggressive reporting practices than Hong Kong auditors, who behave more aggressively because their working environment is less litigious. Moreover, this study finds that the litigation environment interacts with client business risk and client retention pressure to affect the auditors’ decisions. These results reveal that auditors employed in different litigation environment may not be affected by the same factors when making audit judgments. Therefore, US auditors should be cautious when they manage audit engagements that require the participation of auditors practicing in different jurisdictions. This study presents the following implications to policymakers, standard-setting organizations, and international accounting firms. First, the swift growth of cross-listings in global markets has significantly increased the number of foreign companies listed in US capital markets. Since many professionals who audit US publicly-traded companies practice accounting outside of the US, successfully enforcing laws and regulations (e.g., SOX) across judiciary boundaries upon auditors who practice in different litigation environments can be challenging. Therefore, it is imperative for US lawmakers and regulators to seek cooperation from policymakers in foreign countries in order to ensure that financial statements audited by foreign auditors, filed with the SEC and used by stakeholders in the US, are of high quality. In recent years, standard-setting organizations have invested a great deal of effort to enhance the quality of financial reporting. Despite efforts to promulgate new and to update existing accounting principles, investors and creditors around the world still have reservations about the quality of earnings reported in financial statements. To mitigate this concern, the impact of jurisdiction-specific factors should be taken into account in the standard-setting process. Failure to consider this potential effect could jeopardize the effectiveness of any international accounting standards that are implemented. Finally, major accounting firms have expanded operations to many international markets by affiliating with local accounting firms in the foreign countries. To maintain audit quality and to manage auditors’ business risk properly, US accounting firms are responsible for maintaining the overall audit quality of multinational engagements that originated in the US. As the weight of conglomerates’ revenues generated from global business increases, the proportion (and therefore the importance) of financial statements audited by foreign auditors will continue to increase. As a result of this trend, one can expect that certain audit judgments will be delegated to auditors employed outside of the US. Hence, it is crucial for engagement partners in US offices to understand how auditors employed in other jurisdictions with different litigation environments render their professional judgments so that they can strengthen quality review policies and procedures to ensure that risk preferences in the US offices are met. There are two potential limitations to this study. One is that we used jurisdiction in this study to proxy the differences in the litigation environments of the US and Hong Kong. As illustrated in Exhibit 1, we have controlled several key factors suggested in the literature that could potentially affect auditors’ decisions. However, it is possible that other uncontrolled factors, such as difference among auditors, reporting rules, and reporting conventions across jurisdictions, could also affect auditors’ judgments. Another issue has to do with the potential effect of national culture on auditors’ decisions. Although Ho and Chang (1994) have reported that national culture is not a dominant factor when auditors make professional judgments, it may be premature to entirely rule out the effect of culture on audit decisions. As to the direction of future studies, researchers are encouraged to examine whether other factors would motivate auditors to reach audit decisions in favor of their clients. For instance, as Bazerman et al., 1997 and Johnstone et al., 2002 stated, auditors have significant social and financial incentives to please a client’s management. Therefore, they may commit to the client’s preferred accounting method because they think it is the best or at least of high enough quality to be used in financial reporting (Kadous et al., 2003). Because of the sophisticated nature of clients’ aggressive financial reporting, it is worthwhile for researchers to continue exploring theories, incorporating additional variables, and conducting further studies to advance our understanding on auditors’ decisions to go along with clients’ aggressive reporting choices.