The Relationship between Client Advocacy and Audit Experience: An Exploratory Analysis

Abstract

SUMMARY This paper reports the results of an exploratory study designed to investigate whether auditors assume the role of client advocate. Results indicate that auditors did not automatically assume an advocacy position. However, when client interests were made salient, experienced auditors exhibited behavior consistent with advocacy. These results are discussed in light of the conflicting incentives faced by auditors and recent criticisms that auditors may lack the impartiality necessary to provide reliable audits. Given the exploratory nature of this study, further research appears to be warranted so that a more complete understanding of the auditor's willingness to act as a client advocate may be gained. Key Words: Client advocacy, Client preferences, Auditor objectivity. Data Availability: Data used in this analysis may be obtained from the authors. INTRODUCTION Recently, the perception within the financial community is that auditors too often assume the role of client advocate, lacking the impartiality necessary to provide a reliable audit. For example, while recalling his experiences at the Securities and Exchange Commission (SEC), former Director of the Division of Enforcement Stanley Sporkin described how clients influenced the preparation of financial statements. Referring to the case of corporate acquisitions, Sporkin (1993, 7) stated: It was interesting when you would look at the financial reports of the [selling] company ... prepared by its own accountants. And it was also very interesting to look at the report of the accountant that was hired by the company ... tak[ing] over the target. It was night and day! The analyses were different. And what occurred to me was, why should there be these differences? Why should one paint a rosy picture and the other present a much more critical picture? Walter Schuetze, former SEC Chief Accountant, echoed this sentiment by commenting that auditors often behave as cheerleaders for their clients, actively supporting positions that have no authoritative basis (Schuetze 1994). Similarly, Michael Sutton, another former Chief Accountant of the SEC has questioned how close the auditor-client relationship can become before private interests might be placed ahead of those of investors, or that the public will perceive it that way (Sutton 1997, 89). While the issue of client advocacy has received considerable attention, extant research has not directly examined whether the perception of auditors as client advocates is justified. Past studies have shown that auditors can be influenced by explicitly stated client preferences; however, the broader issue of client advocacy has not been addressed. Such an investigation is important because client advocacy implies that auditors will be biased toward client interests, even in the absence of explicitly stated preferences. The remainder of this paper is organized as follows. The second section reviews the client preference literature to provide background for the current study. The third section develops the research questions, while the fourth section details the methodology used to examine these questions. The fifth section presents experimental results. The final section discusses implications of the results, provides limitations and suggests avenues for future research. BACKGROUND Client Advocacy vs. Client Preference As suggested in the extant literature, client preference effects occur when a client clearly states a desired outcome or accounting treatment and the auditor behaves in a manner consistent with the client's wishes. Client advocacy implies a more subtle form of influence. For purposes of this study, auditors are considered advocates if mere knowledge of the client's best interests is sufficient to impact audit judgments. …