This article summarizes our recent study, “Client Identification and Client Commitment in a Privately Held Client Setting: Unique Constructs with Opposite Effects on Auditor Objectivity” (Herda and Lavelle 2015), which examines how individual auditors' identification with, and commitment to, privately held audit clients affects their objectivity. Based on a survey of 102 external auditors, we find that client identification is distinct from client commitment. This distinction is important because identification as a construct is easily and often confused with commitment, and the terms are often used interchangeably. Client identification entails auditors perceiving themselves as one with the client. In contrast, client commitment reflects a responsibility for and dedication to the client, but the auditor and client remain separate psychological entities. Consistent with prior research, we find that client identification impairs auditor objectivity. Conversely, we find that client commitment enhances auditor objectivity.
This paper summarizes the findings, conclusions, and practical implications of our recent study (Herda and Lavelle 2015) concerning auditors' identification with, and commitment to, clients and their different effects on auditor objectivity. Identification is easily and often confused with commitment (Ashforth, Harrison, and Corley 2008). Client identification reflects an auditor's perception of oneness with a client. Client commitment refers to another psychological bond reflecting dedication to and responsibility for a client. Auditor independence issues can lead to audit failures so it is important to examine the effects of these two psychological bonds on auditor objectivity. We investigate client identification and client commitment concurrently in light of their seeming similarities.
Based on a survey of 102 auditors at a large regional firm that principally serves privately held clients, we find that client identification is empirically distinct from client commitment. Confirming previous research (Bamber and Iyer 2007; Stefaniak, Houston, and Cornell 2012; Svanberg and Öhman 2015), we find that client identification impairs auditor objectivity. Extending prior research, this is the first study to evaluate the impact of client commitment on auditor objectivity. Opposite from our finding for client identification, we find that client commitment improves auditor objectivity.
Our results suggest that audit firms should consider ways in which they can reduce client identification and enhance client commitment among their auditors. Taking the perspective of financial statement users, such as shareholders, may weaken client identification among auditors. Building strong (but independent) relationships with clients through mutual respect and fair treatment can enhance client commitment.
The remainder of this paper is structured as follows. The next section summarizes relevant research on identification and commitment. This is followed by a discussion of the survey used in the study. We then provide an overview of the results and conclude with a discussion of the study's practical implications for public accounting firms.
BACKGROUND AND PREDICTIONS
Auditors spend much of their time working with clients toward the joint goal of issuing audited financial statements (Antle and Nalebuff 1991; Francis 2011). Within this service setting where auditors and clients must interact, different psychological bonds may develop among auditors. Some might begin to see themselves as one with the client (i.e., client identification), while others may choose to be committed to the client.
Most studies on identification are based on social identity theory (Haslam and Ellemers 2005). Social identity theory proposes that individuals' social identity comes about from a self-categorization process whereby they cognitively group themselves with others (Tajfel and Turner 1985). Identification is easily confused with commitment due to their seeming similarities (Ashforth et al. 2008). However, commitment refers to an attitude toward an entity rather than a perceived oneness with the entity. Further, commitment is theoretically rooted in social exchange as opposed to social identity (van Knippenberg and Sleebos 2006; Ashforth et al. 2008). Social exchange relationships are often described as subjective, relationship-oriented interactions between individuals and organizations characterized by an exchange of socio-emotional benefits, mutual trust, and a long-term focus (Lavelle, Rupp, and Brockner 2007). Several studies in the organizational (e.g., Cropanzano and Mitchell 2005; Lavelle et al. 2009) and accounting (e.g., Herda and Lavelle 2011, 2012, 2013) literatures use commitment levels as a way to assess the quality of social exchange between individuals and organizations.
In the organizational literature, commitment is now recognized as conceptually and empirically distinct from identification (Klein, Molloy, and Brinsfield 2012). The constructs develop through two separate processes. While identification is a cognitive perceptual construct contingent on factors such as perceived similarity and shared fate with the organization (Mael and Ashforth 1992), commitment stems from quality social exchange relationships between individuals and organizations (Rhoades and Eisenberger 2002). Consequently, we predict that client identification will be distinct from client commitment. Figure 1 presents conceptual illustrations of client identification and client commitment. In Panel A, the auditor's self-perception is strongly derived from the client (client identification), whereas in Panel B the auditor is in a quality social exchange relationship with the client but remains psychologically separate (client commitment).
Prior studies in the accounting literature find that client identification impairs external auditor objectivity (Bamber and Iyer 2007; Stefaniak et al. 2012; Svanberg and Öhman 2015). Consistent with this literature, we predict that client identification will be negatively associated with auditor objectivity.
No previous study has examined the impact of client commitment on auditor objectivity. In our study we simultaneously examine the effects of client commitment and client identification on auditor objectivity. Social exchange relationships, characterized by mutual trust, shared responsibilities, and a long-term perspective, are often evidenced by commitment levels (Lavelle et al. 2007). An auditor who is highly committed to a client operates independently, with a shared sense of responsibility and a long-term perspective. Instead of the auditor automatically trusting the client on a questionable issue (a consequence of client identification), the auditor considers that both parties share an appropriate mutual respect and responsibility in this setting. Even if the client disagrees with the auditor on a disputed issue, the highly committed auditor will focus on his or her professional responsibilities, working in the long-term best interests of the client, and not cave in to client pressure. Accordingly, we predict that client commitment will be positively associated with auditor objectivity.
We test our predictions with a survey of 102 auditors at a large regional firm that principally serves privately held clients. Clients are more likely to exert influence over auditors and auditors are less likely to be able to withstand client pressures in a privately held environment (Svanberg and Öhman 2015) making our research setting ideal for the study of this subject matter. The sample includes 19 staff auditors, 29 seniors, 11 managers, 8 senior managers, and 35 partners.
Respondents were asked to consider their main audit client (i.e., the client at which they spend the most amount of time on throughout the year) when answering survey questions. Participants answered questions related to client identification and client commitment. The questions were drawn from widely used seven-point scales (1 = strongly disagree, 7 = strongly agree). An example of an item measuring client identification is “When I talk about this client, I usually say ‘we' rather than ‘they,'” and an example item measuring client commitment is “I feel ‘emotionally attached' to this client.”
To measure auditor objectivity, we developed a short case involving an auditor-client dispute over the necessity of a subsequent event disclosure. Respondents are told that their client insists that no disclosure is necessary but they (auditor) have reviewed outside evidence to the contrary and believe that disclosure is necessary. As in Bamber and Iyer (2007) and Svanberg and Öhman (2015), at issue is whether the auditor will yield to client pressure. Participants indicated the likelihood that they would require disclosure (1 = very unlikely, 7 = very likely). Thus, lower scores reflect greater client acquiescence. We chose a subsequent event scenario because recent research indicates that auditors may be particularly susceptible to the influence of client preferences when negotiating the resolution of a subsequent event (Chung et al. 2013, 188).
Consistent with our prediction, we find that client identification is empirically distinct from client commitment. The mean (median) values for client identification and client commitment are 3.53 (3.75) and 4.98 (5.10), respectively. Also, as predicted, auditors high in client identification are more likely to yield to client pressure, whereas auditors high in client commitment are more likely to require that the subsequent event be disclosed. Figure 2 depicts our results.
DISCUSSION AND PRACTICAL IMPLICATIONS
Auditor-client relationships and independence concerns are at the forefront of several high-profile accounting scandals (Kerler and Brandon 2010). Consequently, many would likely wince at the notion of advocating for close auditor-client relationships. However, as our study highlights, it is important to clarify the nature of the relationship in question. A relationship characterized by an auditor's perceived oneness with a client (identification) can lead to impaired auditor independence. A relationship characterized by an auditor's responsibility for and dedication to a client (commitment) can enhance auditor objectivity.
Our study has noteworthy implications for audit firms. Audit firms should strive to reduce client identification and enhance client commitment among their auditors. To mitigate client identification and its effects, audit firms should encourage auditors to: (1) keep the perspective of third-party financial statement users in mind as they conduct the audit (Peecher, Solomon, and Trotman 2013); (2) view themselves and clients as members of the same group at a superordinate level (Gaertner and Dovidio 2000)—both can be considered preparers of accurate financial information for the benefit of others (Francis 2011); and (3) realize that they are truly members of the audit firm and auditing profession as opposed to members of the client organization. These and similar attempts should help counter the strong “consulting” culture that exists within many audit environments whereby firms feel they must do almost anything to keep clients happy. Insisting on a disclosure or adjustment can ruffle client feathers and create some conflict over the short term. However, firms should encourage auditors to realize that it is OK for clients to be unhappy with them from time to time, if the alternative is compromising the auditing profession's responsibility to the public.
Unlike an auditor who highly identifies with a client, an auditor who is highly committed to a client operates independently, with a shared sense of responsibility and the client's long-term interests in mind. In an environment of mutual respect and a sense of responsibility to one another, auditors expect the client to value and respect their independent professional judgment, even on a contested issue, without fear of retaliation. As such, the auditor would be less likely to behave in an acquiescent manner to placate a client when evaluating a questionable reporting position.
Commitment develops through social exchange relationships between individuals and organizations (Rhoades and Eisenberger 2002). Therefore, accounting firms should consider ways to foster quality social exchange between their auditors and clients.1 Audit firms should encourage clients and auditors to treat each other fairly, as this has been found to bring about social exchange between auditors and clients (Herda and Lavelle 2013). Audit firms may achieve this by: (1) encouraging members of the audit team to treat client personnel with dignity and respect, as this fair interpersonal treatment is likely to be returned by the client; (2) encouraging client management to treat the audit team with dignity and respect to further foster mutual dignity and respect; (3) using transparent billing procedures with clients; and (4) improving client perceptions of auditor availability by informally checking in with the client throughout the year (Fontaine, Letaifa, and Herda 2013; Herda and Lavelle 2013). These and similar efforts will likely enhance auditor-client social exchange relationships, which can in turn increase auditor objectivity.
Social exchange in this paper refers to subjective, relationship-oriented interactions between individuals and organizations characterized by an exchange of socio-emotional benefits, mutual trust, and a long-term focus. These interactions take place in a work setting. Social exchange in this context does not refer to or include social events between auditors and clients.
David N. Herda is an Assistant Professor at Texas State University and James J. Lavelle is an Associate Professor at The University of Texas at Arlington.
We thank J. Gregory Jenkins and Dorsey Baskin (editors) for their helpful comments and suggestions.