Aggressive Client Reporting: Factors Affecting Auditors' Generation of Financial Reporting Alternatives

Posted: 27 Sep 2001

See all articles by Karla M. Zehms

Karla M. Zehms

University of Wisconsin - Madison - Department of Accounting and Information Systems

Jean C. Bedard

Bentley University - Department of Accountancy

Stanley F. Biggs

University of Connecticut - Department of Accounting

Abstract

This paper examines how features of the task environment interact with task knowledge to affect auditors' generation of financial reporting alternatives. We study this issue in a setting in which an audit client proposes an aggressive financial reporting alternative for a complex revenue recognition issue. Companies' aggressiveness in financial reporting is an important contemporary topic (e.g., Levitt 1999; Levitt 2000). For auditors, aggressive financial reporting increases litigation exposure (e.g., Palmrose and Scholz 2001) and attracts regulatory attention (e.g., Public Oversight Board 2000; SEC 1999). By proposing less aggressive financial reporting alternatives, auditors increase the likelihood that clients will report less aggressively, thereby reducing auditors' risks of litigation and regulatory exposure. We study the effects of two common features of auditors' task environment (the level of engagement risk and the availability of previously generated alternatives) on financial reporting alternative generation, investigating whether these effects are contingent on auditors' task knowledge. Our results support interactive effects for both task environment features. Higher engagement risk enhances generation of alternatives only among higher knowledge auditors, while the presence of an inherited alternative inhibits generation of alternatives only among lower knowledge auditors.

Keywords: Auditing; Alternative generation; Task knowledge; Engagement risk; Inherited alternatives; Revenue recognition

JEL Classification: M49, M41, M43

Suggested Citation

Zehms, Karla M. and Bedard, Jean C. and Biggs, Stanley F., Aggressive Client Reporting: Factors Affecting Auditors' Generation of Financial Reporting Alternatives. Auditing: A Journal of Practice & Theory, Vol. 21, No. 1, March 2002. Available at SSRN: https://ssrn.com/abstract=285368

Karla M. Zehms (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-234-1052 (Phone)
608-265-5031 (Fax)

Jean C. Bedard

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2410 (Phone)
781-891-2896 (Fax)

Stanley F. Biggs

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States
860-486-2374 (Phone)
860-486-4838 (Fax)

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