What Can Employee Perceptions of Management Tell Us About the Relation Between Tone at the Top and Audit Production Costs?

42 Pages Posted: 30 Jun 2018 Last revised: 26 Jun 2019

See all articles by Jace Garrett

Jace Garrett

Clemson University

Rani Hoitash

Bentley University - Department of Accountancy

Douglas F. Prawitt

Brigham Young University

Date Written: June 8, 2019

Abstract

According to the internal control and auditing literatures, “tone at the top” plays an important role in entities’ internal control over financial reporting (ICFR) and in auditors’ planning and risk assessment decisions. We offer new insights on the relation between tone at the top and audit production costs by measuring tone at the top based on employees’ perceptions of management as independently solicited and gathered by Great Place to Work Institute (GPTW). Consistent with prior research findings that use material weakness disclosures as a proxy for internal control quality, we find that tone at the top is associated with reduced audit production costs. However, we find that the effect of tone at the top continues to be associated with audit production costs even for firms that have no material weakness disclosures, suggesting that auditors observe and rely on tone at the top even where ICFR is deemed to be effective overall. Our new proxy allows us to offer additional new insights. For example, we find that the relation between tone at the top and audit production costs is especially strong when employee perceptions relating to tone are more consistently held throughout the organization. We also find that a positive tone at the top is more positively associated with audit production costs in the presence of indicators of heightened client risk (i.e., higher earnings manipulation risk and complex accounting). Additionally, when we disaggregate our tone at the top measure into two components (employee perceptions of integrity and communication practices), we find that in higher risk settings, integrity is particularly strongly associated with audit production costs.

Keywords: Tone at the top, Audit Pricing

Suggested Citation

Garrett, Jace and Hoitash, Rani and Prawitt, Douglas F., What Can Employee Perceptions of Management Tell Us About the Relation Between Tone at the Top and Audit Production Costs? (June 8, 2019). Available at SSRN: https://ssrn.com/abstract=3196765 or http://dx.doi.org/10.2139/ssrn.3196765

Jace Garrett (Contact Author)

Clemson University ( email )

Clemson, SC 29631
United States

Rani Hoitash

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

Douglas F. Prawitt

Brigham Young University ( email )

Provo, UT 84602
United States
801-422-2351 (Phone)

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