Does Ethical Culture in Audit Firms Support Auditor Objectivity?

Abstract

The suggested cause of constrained auditor objectivity has been centred on auditors' financial incentives and long audit tenure. Recent research has challenged those assumptions and questioned the effectiveness of auditor rotation to counteract short-tenure threats to auditor objectivity. Audit firms and regulators need to adopt methods for enhancing auditor objectivity that are effective in various auditor–client relationships. This study examines whether audit firm ethical culture is positively related to auditor objectivity. Based on the responses of 281 practising auditors, the findings indicate that auditors are more likely to make objective judgments in ethical cultures characterized by the rewarding of ethical behaviour and punishment of unethical behaviour, prevalence of ethical norms, visible ethical leadership, and low emphasis on obedience to authority. In conclusion, evidence indicates that auditors in audit firms with a strong ethical culture are more likely to maintain auditor objectivity than are auditors in less supportive cultures. This suggests that audit firms should promote a strong ethical culture to reduce the risk of constrained auditor judgment.

Keywords:

• auditor objectivity
• audit firm
• ethical culture

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Auditor objectivity, objective judgment, and auditor client acquiescence are used interchangeably. Higher levels of auditor objectivity or objective judgment mean lower levels of acquiescence, and we refer to auditor client acquiescence mostly when describing our method, because we explicitly measure auditor objectivity by the extent to which the auditor acquiesces to the client-preferred accounting position.

2 As a robustness test, we conducted ordinal logistic regression with auditor client acquiescence as the dependent variable. The results compare well with the linear regression results.