The impact of authentic leadership and ethical firm culture on auditor behavior

Abstract

Unprofessional behavior has resulted in several high-profile financial scandals and business failures. Many blamed external auditors for failing to detect and/or report errors and fraud in financial reports. Leaders within major audit firms are urged to foster more ethical firm environments as a means of inhibiting dysfunctional auditor behaviors (DAB) s. This advice is based on two assumptions: (1) auditor behavior is one element of audit quality and (2) the behavior of employees is influenced by the ethical culture created by leaders. Little empirical evidence exists, however, about audit firm cultures, and there is even less research on how leadership and firm culture impacts audit quality. This study was designed to examine subordinates’ perceptions of leaders within the audit profession and the leaders’ likely impact on firm culture and auditor behavior. Analysis of surveys from 120 in-charge auditors suggest that most firm leaders exhibit high levels of the constructs (transparency, ethical perspective, self-awareness, balanced processing) comprising authentic leadership. Further, firm cultures were perceived to be highly ethical. These measures of authentic leadership and ethical organizational culture were found to be negatively correlated, at a statistically significant level, with in-charge auditors’ perceptions of the frequency of DAB. This study is important because it helps to explain factors impacting variance in dysfunctional auditor behavior. The findings from this research suggest that when subordinates perceive their leadership as authentic and view themselves as part of an ethical firm culture, a decline in the frequency of dysfunctional auditor behavior follows.