British Accounting Review (1996) 28, 101–120

A SURVEY OF TIME BUDGET PRESSURE ANDIRREGULAR AUDITING PRACTICES AMONG

NEWLY QUALIFIED UK CHARTEREDACCOUNTANTS

CAROLINE WILLETT&

MICHAEL PAGEUniversity of Portsmouth

The paper reports a postal survey of successful finalists of the exams of the Instituteof Chartered Accountants in England and Wales. The auditing profession has facedincreasing cost pressure arising from competition and economic recession. Firms havestriven to increase audit efficiency and reduce chargeable time. It was hypothesizedthat time budget pressure and other factors might produce irregular short cuts in auditprocedures: i.e. that similar behaviour to that reported by Raghunathan (1991) andother studies would be found in the UK. Respondents were asked about the impactof time budget pressures on their work, about irregular auditing practices similar topremature sign off and certain contextual variables. An appreciable incidence ofirregular auditing was discovered which was associated, inter alia, with perceptions oftime budget pressure, perception of a firm culture of acceptance of irregular short cutsand areas of work which were felt to be unimportant. The implications of thefindings for the auditing profession and individual firms are considered together withrecommendations for future research.

1996 Academic Press Limited

INTRODUCTION

Auditing is one of the cornerstones of the system of accountability andfinancial reporting which supports the UK financial system. Although anunqualified audit report consists of only a few lines, the audit fee for a largecompany may exceed a million pounds. Much of this fee is the time costof relatively junior audit staff undertaking routine procedures, which formthe foundation of the subsequent judgements taken by audit partners.

The authors are grateful to Tony Puxty, participants at the British Accounting Association annualconference at Strathclyde University and colleagues for their comments.

Correspondence should be addressed to: M. J. Page, Department of Accounting and ManagementScience, Portsmouth Business School, Locksway Road, Southsea, PO4 8JF, UK

Received 30 November 1994; revised 28 June 1995; accepted 14 September 1995

0890–8389/96/020101+20 $18.00 1996 Academic Press Limited

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While there are some significant differences of approach, firms organizetheir work for substantial audit clients in similar ways. Substantive tests,tests of detail and other tests involving inspection of records and otherroutine procedures are undertaken by relatively junior staff in accordancewith plans devised and monitored by more senior staff. An engagementpartner exercises overall control and negotiates with the client about theauditor’s findings. Rarely does the work done by junior staff result in issuesof significance for the final audit report. External auditors rarely discoversignificant fraud and the accounting systems of large clients are usuallyreliable. Nevertheless, routine audit work is a necessary part of the auditor’sprocedures, even for large clients with sophisticated accounting controls.

Recently auditors have come under considerable pressure to increase theefficiency of their work. Pressures have arisen from increased competitionamong audit firms and economic recession has reduced the quantity andprofitability of firms’ consulting activities while increasing cost consciousnessamong clients.

Audit fees are inter alia a function of time spent by staff, and audits arecontrolled through time budgets for different phases of the work. Timebudgets for tasks are set as targets for staff, and where there is a firm datefor reporting, deadlines may become absolute. It is possible for staff toreduce time taken for tasks by taking unapproved short cuts, for exampleby rejecting problematic items from samples, by testing fewer items thanreported or by ignoring errors.

Since the work which junior staff do is the foundation of the audit opinionthen failure of work by those staff could potentially lead to significant auditfailure. Although firms have reduced the amount of detailed testing whichthey undertake there is an ultimate requirement to undertake detailed testing(Turley & Cooper, 1991, p. 106): at some point auditors need to check thatthe books record the transactions which have taken place.

This paper reports a postal survey of successful finalists at a diet of theInstitute of Chartered Accountants in England and Wales PEII examinations.The subsequent sections of the paper describe the nature of irregularauditing, previous research, the research questions and method, results ofthe survey, discussion of the results and conclusions.

IRREGULAR AUDITING

The phenomenon which we describe does not have an established ter-minology. American writing describes ‘premature sign off’ (PSO) as ‘auditpersonnel signing off audit programme steps before completing one or moreof the required audit procedures’ (Raghunathan, 1991). In a literal sense,PSO includes both the case where audit procedures were subsequentlycompleted and where they were not, however it is an implicit assumptionthat subsequent completion of procedures rarely occurs. There is a spectrum

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of behaviours, which range from expediency to dishonest recording of workdone which come under the heading of what we choose to call irregularauditing.

The following examples of behaviour which would constitute irregularauditing are derived from the authors’ analysis of audit methods anddiscussion with auditors in practice.

(1) In choosing items to test, the auditor may gain some insight into thecomplexity of, and the likelihood of detecting an error in, a transactionfrom the appearance of documents which form the starting point of thetest. An invoice which has manuscript queries and annotations andsupporting documents stapled to it may be an obvious source of trouble.The auditor may choose a simpler document out of expediency, perhapscoupled with some rationalization that a simple transaction is ‘morerepresentative’.

(2) In testing items an auditor may claim to have checked the calculations,on say, 50 documents, without recording which documents, when heor she has only checked 30.

(3) In testing identified items, say named debtors to cash received after theyear end, the auditor may ‘tick’ that cash has been received for some,perhaps small, items without checking that it has in fact been received,or may accept inferior evidence rather than checking documentaryproof.

(4) And in an extreme case, an auditor might report that the outcome ofa test had been satisfactory, when it had not been.

Detectability

In example (1) above, the choosing of one document rather than another,where the auditor has discretion about choice of item, is unobservable.Discretion about choice of item is likely to be the rule rather than the normsince firms do not adopt rigorous statistical sampling methods which wouldremove choice from audit staff (Turley & Cooper, 1991, p. 120).

Subsequent reperformance of the audit test could not establish theauditor’s avoidance of a troublesome-looking transaction. Similarly in ex-ample (2), except when the auditor marked individual documents, therewould be no way of falsifying the assertion in the audit working papers asto work done. Alternatively if the documents were marked then the workcould be checked, but unless the documents were in sequence, it might bedifficult or impractical to find them again and prove that a lesser numberhad been checked than the auditor had claimed.

In example (3), the auditor takes the risk that having claimed that sometime was correct, it subsequently turned out not to be. But there could wellbe the defence, in relation to a single item, of honest mistake. The sameconsideration applies to example (4). Only in the case that a clerk was

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found to have a pattern of errors in his or her auditing would firms be ableto infer that work was being systematically irregularly performed.

Proof of irregular auditing depends on the possibility of reperformanceof audit tests, although suspicions may be aroused by absence of errorsdetected or improbably short times taken to perform tests. Some auditorsmay rely on the reluctance of firms to reperform work even where theycould in principle be caught out in irregular auditing. Discussions withtechnical personnel from Big 6 firms indicates that both reperformance ofwork and detection of irregular auditing are rare.

Safeguards Against Irregular Auditing

Auditors have recently become subject to audit regulation as a result of theCompanies Act (1989). Audit Regulations and Guidelines (ICAEW, 1991)require firms to ‘establish and maintain quality control procedures’, butprovides no further detail. At the time of the research quality control wasdealt with in two Auditing Guidelines. APC (1980) requires that:

The work performed by each member of the audit staff is reviewed by moresenior persons in the audit firm. This is necessary to ensure that the work wasadequately performed and to confirm that the results obtained support theaudit conclusions which have been reached. [paragraph 14(d)]

APC (1984) requires that the work of more junior staff should be subjectto ‘supervision and review’ and that the work of such staff should beevaluated. There is no specific requirement or suggestion in either guidelinethat the work of staff should be reperformed to ensure that the work recordedhas actually been performed. The extent to which the presence of anaccountant in charge on site at audit engagements ensures the integrity ofjunior staff’s working papers is an open question.

Few if any instances of irrregular auditing have come to public attention.If it is discovered, firms are likely to deal with it internally rather than sufferthe opprobrium of public exposure. Our enquiries have not discovered anyinstance when irregular auditing by staff has been reported to the ProfessionalConduct Department of ICAEW. Firms have told us that there have beencases where employees have been dismissed when irregular auditing hasbeen discovered, but these do not appear to be frequent.

Pressures Potentially Leading to Irregular Auditing Practices

Audit firms in the UK have for some years faced sustained audit fee pressure.Competitive tendering has become common and allegations of ‘low-balling’have been frequently heard. (As Hermanson et al. (1987) point out, auditingis a basically finite market, and price cuts result not in extra business butin its redistribution at a lower total revenue.) At the same time, auditregulation has become more onerous (particularly for small firms) and other

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costs such as insurance have soared (particularly for large firms). Murphy(1991) has even speculated that auditing may ultimately no longer befinancially viable.

Firms have responded in a number of ways. Audit methods have beendeveloped which enable less time to be spent, and staff levels have beencut. In the past activities more profitable than auditing have been expanded,but in the current recession consulting and corporate finance work hasreduced in volume. At the same time audit fee resistance among recessionhit clients has become higher. It is reasonable to suppose audit timebudgets have become tighter; Hopwood’s (1973) classic study of excess andinappropriately administered budget pressure in a manufacturing settingillustrates the dysfunctional consequences which can occur.

In the present context, ability to meet time budgets may be a criterionfor advancement or even continued employment within the firm (Fleming,1980). Faced with a deadline such as a reporting date, staff can, withinlimits, work extra hours. But where there are time budget pressures, extrahours will have an adverse effect on the budget. Staff can then choose towork unrecorded overtime or to take unapproved short cuts. Previousresearch and anecdotal evidence from fellow accountants and ex-studentssuggest both of these occur.

There are other factors which may lead to irregular auditing. Where firmsuse sequential sampling schemes, detection of errors leads to additionalwork being necessary and increasing time budget pressure. If errors aredetected at the compliance testing stage, less confidence can be placed oninternal control and a need for additional substantive testing may arise—again increasing time budget pressure.

Rhode (1978) indicates that where staff have formed the opinion thatwork is unimportant to the final audit opinion they are more likely to takeirregular short cuts. Laziness and boredom may also be factors leading toirregular auditing.

PREVIOUS STUDIES

Previous work on irregular audit practices has been concentrated in theUSA. Rhode (1978) carried out a survey of 2016 AICPA members, mostof whom were in public practice, but including some who had left. Resultsindicated that under-reporting of time and premature sign off were bothfeatures of the audit profession, with 58% of respondents admitting to PSO.Of the respondents 10% had been asked to sign off prematurely by seniorstaff. The reasons given for PSO were broadly that enough work had alreadybeen done, the budgeted time was insufficient, the audit step was unnecessaryor the work was boring. PSO was found to be more prevalent in smallerfirms and among more junior staff. The ability to appear to have met timebudgets was perceived to be an important determinant of future advancement

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within the firm. Accountants who had left auditing frequently cited timebudget pressure as a contributory factor in their decision to leave.

Alderman & Deitrick (1982) extended the study to cover less senior staffand highlighted the marked contrast between the upper and lower levels ofseniority when staff were asked their perception of the existence of PSO.Of junior staff, 39% accepted its occurrence against only 11% of partners.This study was confined to partners and staff of Big 8 firms, and respondentswere asked to report their perceptions of the incidence of PSO rather thantheir actions.

Margheim & Pany (1986) used two hypothetical cases to investigate otheraspects of irregular auditing including the effects of the firm having qualitycontrol standards specific to PSO, the reason for the time pressure, thenecessity of the audit procedure and firm size. They found that qualitycontrol standards and the reason for the time pressure had little effect, thatPSO was less likely for steps considered important and that PSO was morelikely in non-Big 8 firms.

Laboratory tests on auditor effectiveness under conditions of varying timebudget pressure were used by Waggoner & Cashell (1991) to try to assessthe audit risk implication of PSO. They found that increased time pressuredid not have a significant impact on auditors’ ability to detect deviations inthe transactions being audited. This ability was poor at all levels of pressure,with only an average of 59% of the deviations present in the data beingdetected.

Most recently, Raghunathan (1991) found that 55% of respondents drawnfrom Big 8 firms admitted to PSO although 73% of these claimed to do it‘rarely’ or ‘very rarely’. He found the most vulnerable audit areas to beanalytical review and supervision. The most frequent cited reason was thatthere was a low risk of missing material errors, but seniors also cited timepressure.

McNair (1991) discusses the conflicting pressures on auditors which giverise to social and ethical ambivalence and find expression in various ‘timebudget-based behaviours’. Although 11 partners interviewed by McNairunanimously agreed that PSO should result in dismissal, 21% of audit staffadmitted to PSO. McNair suggests that firms place staff members in a‘double bind’ whereby formal procedures designed to ensure quality andsafeguard reputation are contradicted by informal ‘counternorms’ of be-haviour required to meet budget, such as PSO and under-reporting of time.The conflict is internalized by auditors whereby learning to trade off costand quality concerns renders the double bind ‘undiscussable’.

Other researchers have picked up the theme of under-reporting of charge-able time (UCT). Lightner, Adams & Lightner (1982) found that 63% ofindividuals at some time resorted to this and that it was associated with aperception that the time budget was unattainable. There was also frequentpressure from supervisors to report reduced hours. In a discussion paperbased on the above study, Lightner, Leisenring & Winters (1983) explored

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the adverse consequences of UCT in terms of underbilling and distortionof future budgets, with consequent risk of PSO. Kelly & Margheim (1987,1990) found that a fixed audit fee, greater structuring of tasks, and type Apersonalities among either juniors or seniors were all associated with UCTby staff, but were not associated with additional PSO.

Evidence on the way in which US firms develop their budgets wascollected in a survey by Fleming (1980). For recurring clients, the baseused was the actual reported hours for the previous year. Junior staff werenot involved in the budget setting process. Budgets were normally brokendown by segment, with audit assistants tending to work individually on asegment. Fleming also looked at employee performance evaluation, andfound that ability to meet deadlines was used by all firms as one of a numberof factors assessed at the end of larger jobs.

RESEARCH QUESTIONS

The research was designed to explore issues relating to time budget pressuresand irregular audit procedures.

Does Irregular Auditing Occur in the UK?

Previous research has indicated that PSO occurs in the US and also in NewZealand (Cook & Kelley, 1991). There is a lack of UK evidence aboutsimilar behaviour, but the auditing environment is similar. Moreover recentdevelopments in UK audit regulation together with the effect of growinginterfirm competiton on fees suggest that auditors may be experiencingincreasing time budget pressures and that some dysfunctional responsesmight be predicted.

Why Do Auditors Resort to Irregular Audit Practices?

Given the changes in the audit environment noted above, we identified timepressure as a likely driving force behind irregular auditing. We thereforesought to establish firstly whether time budgets were perceived to havebecome tighter, and secondly whether auditors attributed their irregularauditing to pressures of this kind. Rhode (1978) found time pressure to bea potential cause of substandard audits but Raghunathan (1991) found itto be significant only at the senior level. The possibilities that the workmight be considered either too unimportant or too boring to be worthcompleting correctly were also explored. Raghunathan found that auditorswere most likely to take shortcuts with tests which were perceived to beunlikely to uncover material errors.

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Which Areas of the Audit are Most Likely to Suffer from PSO?

Rhode found that tests which only involved ticking a schedule were morevulnerable than those requiring collection of evidence, while Alderman &Deitrick (1982) found that internal control testing was perceived to be mostat risk. We therefore hypothesized that compliance testing might be theaudit area most liable to irregular auditing. Such testing does not alwaysrequire detailed recording of evidence, and may be considered to be of lessimmediately obvious value by some auditors.

Which Specific Irregular Audit Practices are Used?

The term ‘premature sign off’ is taken to mean that a test has not beencompleted in accordance with the firm’s requirements i.e. it may have beencompleted in an irregular fashion, or not completed at all. We have notfound any prior research describing specific practices so we drew on anec-dotal evidence to offer respondents a number of possibilities and askedthem to describe other methods.

Who Signs Off Prematurely?

We anticipated that there would be a range of responses to our explorationof the incidence of irregular auditing by respondents. Questions seek toidentify the characteristics which distinguished respondents more inclinedto irregular auditing from those less so inclined.

Again, we found little prior research in this area, except on the size ofthe firms most likely to suffer from PSO. Rhode (1978) found it to occurprimarily in local and regional firms, though these categories may not haveprecise UK equivalents in terms of scale or organization. We explored arange of contextual variables.

RESEARCH METHOD

A postal questionnaire was distributed to a systematic random sample of500 successful finalists at the July 1992 examinations of ICAEW. Thequestionnaire was accompanied by a letter explaining that the survey wasinvestigating pressures on auditors. The ICAEW pass list gives the firm andlocation of each successful finalist. Questionnaires were posted to the officeaddresses of finalists. Total anonymity was guaranteed to respondents, buta separate postcard was included in the mailing so that respondents couldindicate that they had replied, or did not wish to take part. No reminderswere sent.

An advantage of a mail survey is that it can offer anonymity to respondents.We did not seek information about the firm in which people were employed

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other than an indication of its size nor did we identify questionnaires in anyway. Alternative research strategies involving interviewing or distributionof questionnaires by co-operating firms would have reduced anonymity.Obtaining co-operation from firms could have biased responses and re-spondents might not have believed that their answers were truly confidential.

The ICAEW publishes its examinations pass list and this provided asuitable sampling frame since the group is relatively homogeneous andcomprises people at roughly the same professional stage and who haverecently been responsible for basic auditing procedures. Under the termsof the training contract, employers are required to give all students experienceof auditing. A minor disadvantage was that although envelopes were ad-dressed personally, they were sent to firms’ addresses. It is possible thatsome questionnaires were intercepted and not passed on to the addressee.This happened on at least one occasion.

There are also well-known disadvantages to postal surveys: inter alia, itis not possible to gather extensive data with a questionnaire, response ratesare likely to be low, it is difficult to tell whether non-respondents aresystematically different from respondents. However, these problems did notinvalidate exploratory research of this kind. We are not so much interestedin the precise frequency of irregular auditing practices, but whether theyoccur to any significant extent and the factors which may be associated withthem.

The questionnaire contained 23 questions. Seven questions related tobudgeting and time pressures, seven to irregular auditing and the remainderto background information and opinions of respondents on issues such asjob security and career intentions. The questionnaire was deliberately simplein design since the research is exploratory in nature. Most questions couldbe answered by simple ticks and in some cases multiple answers werepossible. It was anticipated that a highly educated group of individuals whospent a fair proportion of their working lives responding to questionnairesin the form of audit programmes would have little difficulty respondingappropriately. Pre-testing on a small sample of the population indicatedthat this was the case.

Irregular auditing is a sensitive topic: respondents who admitted to itwould in effect be admitting breaches of ICAEW ethical guidelines andtheir contracts of employment and making themselves liable to dismissal ifdiscovered. Accordingly some care was taken in the ordering of questions.The question of firms’ attitudes towards irregular short-cuts was placedbefore questions relating to individual behaviour. Respondents were askedabout the behaviour they were tempted to take, their actual behaviour andtheir perceptions of that of their colleagues. Asking for projections ofbehaviour in this way is an established method of research into sensitiveissues, including irregular auditing. For example Alderman & Deitrick(1982) asked respondents about the behaviour of ‘some auditors in myfirm’.

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The questionnaire did not go as far as to make presumptions aboutbehaviour as is sometimes done in research into sensitive issues (Moser &Kalton, 1971, p. 325). Subsequent to distributing the questionnaire somerepresentatives of firms (but not members of the sample population) sug-gested that the questions could be leading. Questions were not designed toelicit biased answers and the sample was of an educated group, used tofilling in audit questionnaires. Moreover, it is now generally recognized that,in the words of Marsh (1982, p. 145), ‘. . . the search for unbiasedquestionnaire wording is a particularly fruitless and naive quest’.

RESULTS

From 500 questionnaires which were despatched, 112 (23%) usable re-sponses were received. This response rate is lower than in some previousresearch but nevertheless provides a usable number of responses. The lowerresponse rate may be due to such factors as the co-operation with firmsenjoyed by Raghunathan (1991) and Alderman & Deitrick (1982).

Of the responses, 61% came from audit staff in Big 6 firms, 39% fromstaff in medium-sized firms or small firms. The comparable figure for thesample frame was 66% of the frame being comprised of people from Big 6firms. Of the respondents, 63% were male compared with approximately67% of males in the population passing ICAEW Part II exams. Using aNormal approximation to the binomial distribution for the responses, thecomposition of respondents by size of firm (large versus medium or small)and sex was not significantly different from the underlying population. Nodifferences were found in the pattern of responses of late respondents tothe questionnaire compared with earlier respondents.

Does Irregular Auditing Occur in the UK?

The concept of irregular auditing was operationalized by asking if re-spondents had been tempted to speed up testing by three irregular methods:rejecting awkward-looking items from a sample; not testing all the items ina reported sample; or accepting audit evidence about which they weredoubtful (results reported in Table 2 below).

We then asked how often they had speeded up testing in this way. Theresponses indicate that most recently qualified staff have resorted to irregularauditing at some time during their training. Table 1 shows that only 22%of respondents claimed never to have speeded up testing by irregularmethods.

The frequency of use of the irregular methods compares with Raghu-nathan’s result that 48% and 42% of staff and seniors respectively claimednever to commit PSO. Fewer respondents to our questionnaire claimed

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TABLE 1

Frequency of speeding up testing by irregularmethods

%

Frequently 4·5Occasionally 28·6Rarely 36·6Never 22·3Non response 8·0

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never to use irregular methods, even though PSO covers a wider spectrumof behaviours.

Which Irregular Audit Practices Are Used?

Two questions dealt with different irregular auditing techniques: one dealtwith behaviour which respondents were ‘tempted’ to undertake because oftime pressure, the other asked about respondents’ perceptions of theircolleagues’ behaviour. Both of these questions are indirect in that they donot ask for actual behaviour of respondents. Indirect questions were askedbecause of the sensitive nature of the research. The responses are set outin Table 2.

Respondents imputed a higher level of irregular short cuts to theircolleagues as a group than they admitted to being tempted towards them-selves because of time pressures: for example 63% of respondents thoughtthey had encountered colleagues who had speeded up testing by rejectingawkward looking items from samples compared to 54% who admitted being

TABLE 2

Reasons for speeding up testing irregularly

Have you been Have youunder so much encounteredpressure you were colleagues whotempted to speed have speededup testing by: up testing by:% %

Rejecting awkward-looking items from a sample 53·7 62.5Not testing all items in a reported sample 26·8 45·5Accepting doubtful audit evidence 24.1 41·1Other 16.1 4·4

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tempted in that direction themselves. This is not inconsistent since mostaudit staff have multiple colleagues. Similar relationships held for othershort cuts.

Short cuts which were volunteered by respondents included ‘taking shortcuts as told by seniors’, ‘not clearing review points’, ‘subjective samplingtechniques’, ‘reduce level required on substantive tests’, ‘accepting doubtfulaudit evidence only if immaterial’, ‘reducing sample size’, ‘time pressuremay have led to substandard work by very overworked, overtired teammembers’, ‘phantom ticking’.

Staff gave other reasons for being tempted to speed up audit work: 30%were tempted to speed up work because of boredom and an overlapping40% were tempted because the work was unimportant.

Why do Auditors Resort to Irregular Auditing Practices?

Budgeting and budget pressure. In view of previous findings we explored thelink between budget pressure and irregular auditing. Nearly all respondents’firms either ‘always’ (71%) or ‘for some types of job’ (25%) prepared adetailed budget for audits.

Most staff (88%) believed that time pressures had increased over theirperiod of training. This perception seems to be a common feature of studiesof this kind and may be due to an increase in pressure with increasing senioritywithin firms although a number of respondents’ comments suggested thatthe increasingly competitive environment for audit work and downwardpressure on fees during the recession were causes of increased pressure.

When asked for what proportion of jobs budgeted time was adequate ornot, the mean response was that in 53% of cases budgeted time was notquite enough, and in 15% of cases it was not nearly enough, whereas timewas budgeted just right in 26% of cases and was more than enough in 6%of cases.

Where more work was required due to unforeseen circumstances, thequestionnaire offered a choice of tactics by which this additional work couldbe accommodated. Of audit staff, 80% said that firms responded to theneed for additional work by exerting more pressure on staff. Forty percentsaid that additional time was allocated. Relatively few audit staff said thattheir firms responded with more efficient audit techniques (15%) or reducedaudit quality (10%). Multiple answers were permitted to this question.

Where work was taking too long it was accommodated by working fasteron other tasks (47%); unpaid overtime (38%) and paid overtime (26%).Paid overtime would enable the deadline to be met but would result inbudget over-runs. Unpaid overtime would meet the deadline, but with theburden borne by staff.

It is apparent that most staff at times found themselves under considerablebudget pressure, and that budget pressure was more likely to tempt auditorstowards irregular auditing than boredom, unimportant work or other factors.

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TABLE 3

Reasons for being tempted to speed up testing byirregular methods

%

Budget pressure 60·5Boring work 30·3Unimportant work 41·1Other 9·8

Which Audit Areas are Most Likely to Suffer from Irregular Auditing

The audit area most frequently ‘speeded up’ was compliance testing (40%of respondents) lower frequencies were recorded for stock (23%), creditors(22%), debtors (20%), bank and cash (15%) and completion (10%). Thehigher rate of ‘speeding up’ for compliance testing was due to the higherlevel of participation by auditors who ‘rarely’ took short cuts i.e. on the rareoccasions when these auditors took short cuts it tended to be when com-pliance testing. This would be consistent with a belief that the likelihoodof harm from short cuts in compliance testing is less than in substantivetesting.

Who Commits Irregular Auditing?

Size of firm of respondents. The original Rhode (1978) study gave theimpression that premature sign off was a problem more frequent in smallerfirms. In the present study, cross tabulation of firm size and frequency ofirregular auditing showed no significant difference between Big 6 firms andothers.

Big firms were different (better than 5% significance, Chi square test)from other firms in several respects. Big 6 firms were more likely to pay forovertime and a higher proportion of respondents said all jobs were budgeted.In comparison with the employees of other firms, employees of Big 6 firmsthought quality, the ability to complete work on time and salesmanshipwere more important for continuation of their jobs. Employees of Big 6firms were also less likely to envisage a career in general practice.

There was no significant difference in responses to other questions. Inparticular, employees of Big 6 firms were not significantly less likely to takeirregular short cuts than employees of smaller firms, nor did they seem tofeel under greater time budget pressure.

In interpreting the significance of multiple cross correlations or othertests it must be borne in mind that some apparently significant associationsmay have arisen by chance.

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Individual Characteristics and Perceptions of Respondents. Table 4 sets outsignificant associations between responses to the question on frequency ofirregular speeding up and other variables. For this purpose, respondentshave been grouped in two ways. Firstly respondents who responded ‘never’are contrasted with respondents who at some time had resorted to irregularauditing (Never vs Rest). Then (Never & Rare vs Rest) respondents who‘never’ or ‘rarely’ speeded up work irregularly are contrasted with ones whodid so ‘occasionally’ or ‘frequently’ (the more frequent group).

The more frequent group were more likely to respond that if extra workon a job were needed then more pressure on staff would result. They werealso more likely to respond that their firms turned a blind eye to irregularauditing. Similarly staff who had taken irregular short cuts were more likelyto perceive that colleagues had also taken irregular short cuts.

Temptation to speed up because some areas of work were perceived asunimportant was associated with irregular short cuts. This finding is con-sistent with previous research. Few of the more frequent group wereexpecting to make a career in auditing.

Respondents were also asked whether their firms ‘in practice turned ablind eye to irregular short cuts’: 27% perceived that their firms did inpractice tacitly countenance short cuts and the more frequent group weremore likely to hold this view.

Apart from associations with taking short cuts in particular audit areas,no significant associations were found with other variables, for examplefrequency of irregular auditing was not associated with sex or whether ornot respondents’ held a relevant accounting degree.

DISCUSSION AND IMPLICATIONS OF RESULTS

There are number of potential biases in the results which are reportedabove. Although we have found little evidence that there is non-respondentbias because the respondents are not representative of the population in thedimensions we have investigated, there is the possibility that bias neverthelessexists. A priori it is not possible to tell in which direction such bias wouldoperate. Because irregular auditing is a sensitive topic it is possible thatauditors who took irregular short cuts would not respond to the ques-tionnaire, hence irregular auditing would be under-represented by responsesto the questionnaire. Some firms expressed hostility to the survey, whichcould have influenced or suppressed responses. As the target populationwas recently successful examination candidates, respondents may have hadhigher ability and more positive attitudes to their work than unsuccessfulcandidates. Alternatively, replying to the questionnaire offered the op-portunity for disaffected employees to ‘vent their spleen’ about dis-satisfactions at work and a situation into which they felt that they had beenforced. In this case irregular auditing would be over-represented in responses.

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TABLE 4

Association between irregular auditing and other responses

Response Variable Grouping 1 significance Grouping 2 significance

PSTAFF 0·09 0·02∗BLEYE 0·10 0·02∗T–AWK 0·0000∗ 0·13T–NTEST 0·02∗ 0·04∗T–EV 0·03∗ 0·07B–WORK 0·17 0·31U–WORK 0·01∗ 0·03∗CARAUD 0·30 0·02∗COL–AWK 0·0000∗ 0·08COL–TEST 0·0003∗ 0·12COL–EV 0·007∗ 0·13

Significance is for Chi square test (after Yates correction) of cross tabulation of frequency of irregularauditing against responses to other questions.∗= significance at 5% level. Grouping 1: Respondents who claimed never to have speeded up testingirregularly contrasted with other respondents. Grouping 2: Respondents who claimed ‘never’ or ‘rarely’to have speeded up testing irregularly contrasted with those who ‘sometimes’ or ‘often’ had.

Response variables:PSTAFF =1 Respondents who said a need for extra work on a job was likely to result in

extra pressure on staff=0 Otherwise

BLEYE =1 Respondents who said their firm turned a blind eye to unofficial short cuts=0 Otherwise

T–AWK =1 Respondents who had been tempted to reject awkward-looking items fromsamples

=0 OtherwiseT–NTEST =1 Respondents who had been tempted to not test all items in a sample

=0 OtherwiseT–EV =1 Respondents who had been tempted to accept doubtful audit evidence

=0 OtherwiseB–WORK =1 Respondents who had been tempted to speed up testing because the work was

boring=0 Otherwise

U–WORK =1 Respondents who had been tempted to speed up testing because the work wasunimportant

=0 OtherwiseCARAUD =1 Respondents who expected to make their own career in auditing

=0 OtherwiseCOL–AWK =1 Respondents who said colleagues had speeded up testing by rejecting awkward-

looking items from samples=0 Otherwise

COL–NTEST =1 Respondents who said colleagues had speeded up testing by not testing all itemsin a sample

=0 OtherwiseCOL–EV =1 Respondents who said colleagues had speeded up testing by accepting audit

evidence about which they were doubtful=0 Otherwise

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In addition some respondents may have given untrue responses. Thesepotential biases have divergent tendencies and it is not possible to tell inwhich direction, if any, net bias lies.

We would find it difficult to believe, however, that any bias in the resultsis so severe that the level of irregular auditing in the UK is not comparablewith, or greater than, the level of premature sign off in the USA. Readersof these results will need to make up their own minds whether such a levelgives cause for concern.

Quality of Audit

A natural first reaction to the results of the survey is that irregular auditingcompromises the quality of audit opinions: if auditors are not carrying outsome tests properly there may be a danger that audit opinions will beformed on the basis on inadequate evidence. However the behaviours whichrespondents recorded were mainly infrequent and were associated with thebelief that the work involved was unimportant. Audit tests form an in-terlocking jigsaw and confidence in the integrity of financial systems isgained from many sources. Because one piece is missing from the jigsaw, itdoes not follow that the picture as a whole is obscured. Nevertheless, firmshave themselves claimed that they have reduced the amount of testingundertaken by using more efficient methods; presumably the testing whichdoes occur is correspondingly more important. The danger from irregularauditing is different in kind from other non-sampling risk because it issystematic. Honest auditor error will always occur but is, by its nature,random: making a mistake on one test is not strongly correlated with othertests. Irregular auditing however has the potential for missing or suppressingsystematic errors. Hence firms need to be aware of the danger of irregularauditing and formulate their procedures accordingly.

When irregular auditing occurs because an employee perceives the workto be unimportant to the final audit opinion, there is a danger that theperception is a false one. Two reasons for this would be:

(1) Reaching invalid conclusions. Although accounting populations arerelatively error free, research into human decision processes suggestsjudgements about the quality of a sample are frequently made usinginappropriate heuristics (Libby, 1981, pp. 158–163). For example anauditor may conclude that a population is error free after testing 10items although the audit programme requires a test of 30 items. Howevera 5% error rate would be expected to show up in sample of 10 onlyabout 40% of the time and even a 10% error rate would produce anerror in a sample of 10 on only 65% of occasions. If such prematureconclusions are being formed and audit staff are resorting to irregularauditing for the remainder of tests, a higher standard of education instatistics and error rates is required.

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(2) Unfamiliarity with audit procedures. In interviews firms suggested thatif irregular auditing occurs it does not impinge on audit quality becauseother audit techniques such as analytical review provide the necessaryconfidence in the integrity of conclusions, but that relatively junioraudit staff do not understand the full picture and therefore do notunderstand the totality of the firm’s methods. The same argumentsuggests that on occasion staff may not realize that work is not coveredby other audit procedures and therefore its importance is wronglyassessed.

If the employee is correct that the work is unimportant, then there is apotential for saving of audit time by not performing a test, but by doing soin an approved way. Although a test may be inappropriate the costs ofdeciding not to do it may be high. A junior auditor may conclude that thetest is redundant, but by experience knows that it will be difficult to convincethe senior of this, who in turn knows that it will be necessary to convincethe manager and the partner. It may take longer and require more effort toexplain that the test is redundant than to take an irregular short cut. If thisis the case there is a potential for firms to reduce testing and to avoidimposing an equivocal ethical position on their staff if they can reduce thecost of authorizing alterations to planned tests.

Implications for Firms

Firms which form the opinion that concern about irregular auditing isjustified could review their procedures to ensure that the incidence ofirregular auditing is minimized. No single measure provides a total safeguard,but a range of actions from changes of test design to culture and com-munication are considered here.

Test design. Certain types of test are more vulnerable to premature sign off.Rhode (1978) found this to be so for tests requiring little or no docu-mentation, suggesting that outright creation of evidence (forgery) is muchless likely than a tick against something not completed. Where possible,tests should require the collection of a piece of evidence for each itemexamined.

This will not be feasible for all testing. Alderman & Deitrick (1982)proposed that the review procedure for vulnerable tests should include aquestion from the supervisor specifically asking whether all steps have beencompleted. This again assumes that provision of false evidence (lying) isless likely than a simple misleading tick. However, a weakness in this methodcould arise from the moral position of the supervisor: Lightner, Adams &Lightner (1982) found instances of seniors encouraging junior accountantsinto under-reporting their time and one respondent to our survey commentedthat he had been told to take short cuts by supervisors. Waggoner &Cashell (1991) suggested that review should include a check to see whether

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significantly more deviations were found in the earlier part of the samplethan the latter part.

A further method could be the re-performance of some tests either by anindependent auditor or by the supervisor (although, as noted above, thesupervisor may not be the ideal choice for these tasks). The procedurewould be time-consuming and not always conclusive, but the threat of itcould have a deterrent effect even if re-performance was infrequent.

Budget-setting. As previously noted, in order to avoid dysfunctional outcomesbudgets need to be set and administered with care. The audit budget hasa number of functions in an accounting firm, and it may be that thesecannot all be satisfied by the same process. For instance, it may be used asa basis for setting fees, control of the progress of the job, cost estimation,performance appraisal, staff allocation and demonstrating that the job wasproperly planned and controlled.

In order for the budget to be accepted, it needs to be realistic. This meansit must take account not only of the features of the job, but also the abilitiesand experience of the staff assigned to it, and should be capable of adjustmentto meet unforeseen circumstances. The basis for setting the budget (oftenthe time taken the previous year) needs to be rigorously reviewed toensure that impossible standards are not being carried forward and possiblycompounded. Junior staff are likely to carry out many of the vulnerablemechanical audit tasks, but the planning and time allocation of the workmay be done by staff who have less recent experience of it, (Fleming, 1980),and thus be more readily persuaded that it could be done unreasonablyquickly. Budgets need to be reassessed periodically throughout a job toconfirm that they continue to be realistic and there may be benefits toinvolving junior members of the audit team in such reviews to buildcommitment and enhance communication as well as ensuring realism.

Overtime. Our survey suggests that unpaid overtime is expected by manyfirms if a job falls behind schedule. Under conditions of time budget pressureand as deadlines approach the options available to an auditor may bereduced to either unpaid overtime or irregular audit practices of some kind.While firms could justly argue that they rely on the professionalism of theindividual to opt for the former it is also reasonable to suppose that paidovertime or time off in lieu would reduce the temptation of the latter.

Culture. Our results suggest that irregular auditing is associated with aperception of a culture in which irregular auditing is permitted, for exampleperception that colleagues take irregular short cuts and/or the firm turns ablind eye to them. Assuming that the potential consequences are too seriousfor any partner to knowingly accept this situation, it seems that there maybe poor communications between the different levels of the firm. Kelley &Seiler (1982) found that in the US, partners did not rate time budget

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pressure a serious problem at the same time as seniors were reporting 27%of their time budgets as unattainable. If staff feel unable to communicatetheir time budget difficulties, it may be because they fear the consequencesfor example because their performance appraisal may be adversely affected.

CONCLUSIONS

Given the limitations of preliminary research there are issues raised by thispaper which indicate a need for further research. The incidence of timebudget pressures could be investigated further, in particular are attitudes ofstaff different depending on whether or not overtime is paid or whethertime off in lieu is given? What are the factors which give rise to unrecordedovertime, and how effective are campaigns by firms to eliminate it?

The range of behaviours which comprise irregular auditing deserve furtherinvestigation. Many will be dependent on the audit approach of firms.Further exploration of reasons for its occurrence is also merited. Forexample, in what circumstances is an audit test regarded as unimportant?What kinds of test are skimped when time budgets are a problem? Whattests are skimped when deadlines are approaching and, even by workingunrecorded overtime, staff cannot complete the required programme?

Research involving the co-operation of firms would allow research to becarried out at greater depth, although it might introduce new biases as wellas reducing old ones.

Despite work going back 15 years in the USA, research into irregularauditing time budget pressure has proved to be controversial in the UK.The findings of our survey indicate to us that the incidence of an, as yet,loosely defined set of behaviours is sufficiently high to merit attention bythe profession. Further research is indicated into the nature of irregularauditing and its association with other factors, particularly time budgetpressure, the recording of overtime and the perceived importance to finalaudit opinion of individual audit procedures.

R

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