Ethical team leadership and trainee auditors’ likelihood of reporting client’s irregularities

Author:Guangyou Liu, Hong Ren
Position:Business School, Sun Yat-Sen University, Guangzhou, China
Pages:157-175
SUMMARY

Purpose This paper aims to investigate the impacts of audit engagement team’s ethical leadership, trainee auditors’ reporting intent and other selected factors on their likelihood of reporting client’s irregularities. Design/methodology/approach The present investigation is based on 150 effective questionnaire responses provided by a group of trainee auditors working for certified public accounting (CPA) firms. The questionnaire items relating to trainee auditors’ likelihood of reporting client’s... (see full summary)

 
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Ethical team leadership and
trainee auditors’ likelihood of
reporting client’s irregularities
Guangyou Liu
Business School, Sun Yat-Sen University, Guangzhou, China, and
Hong Ren
School of International Relations, Sun Yat-Sen University, Guangzhou, China
Abstract
Purpose This paper aims to investigate the impacts of audit engagement team’s ethical leadership, trainee
auditors’ reporting intent and other selected factors on their likelihood of reporting client’s irregularities.
Design/methodology/approach The present investigation is based on 150 effective questionnaire
responses provided by a group of trainee auditors working for certied public accounting (CPA) rms. The
questionnaire items relating to trainee auditors’ likelihood of reporting client’s irregularities are based on
Crawford and Weirich’s (2011) classication of common forms of fraudulent nancial reporting. The authors’
measurement of the audit engagement team leaders’ ethicality is based on the ethical leadership scale
developed in Newstrom and Ruch (1975) and Kantor and Weisberg (2002). Regression models are used to
testify the authors’ hypotheses on the correlations of the trainee auditors’ likelihood of reporting client’s
irregularities with audit engagement team’s ethical leadership, trainee auditor’ reporting intents and other
selected factors.
Findings The major conclusion of this study is that there is a signicantly positive correlation between
trainee auditors’ likelihood of reporting client’s irregularities and their perception of audit engagement team
leader’s ethicality. This paper also points out that trainee auditors’ higher evaluation of stable rm–client
relationship reduces their likelihood of reporting client’s irregularities, whereas their concerns with future
career development increase the likelihood of reporting. In addition, this paper documents the fact that male
trainee auditors more easily perceive the ethicality of their team leader than females, and that trainee auditors
with less academic achievements (lower GPA) tend to perceive more easily the ethicality of their team leader
than those with better academic achievements (higher GPA).
Research limitations/implications Two business ethics variables constructed and used in this
study, i.e. trainee auditors’ likelihood of reporting client’s irregularities and engagement team leader’s
ethicality, can be applied in future research on whistleblowing in the audit profession.
Practical implications Practical implications can also be drawn from the ndings to enhance the
ethical management at both engagement and rm levels.
Originality/value This paper contributes to the audit research literature by providing evidence on the
signicant positive impacts of team leader’s ethicality on the entry-level audit professional’s likelihood of
reporting client’s irregularities.
Keywords Whistleblowing, Ethical leadership, Trainee auditors, Engagement team, Irregularities
Paper type Research paper
Introduction
Whistleblowing in organizations has received considerable attention in the literature of
organizational behaviors and business ethics. Whistleblowing is viewed in business studies
as a kind of pro-social behavior that is related to both the principles for individual moral
reasoning (Miceli and Near, 1984;Dworkin and Near, 1987) and the statutes for
organizational behaviors (Dozier and Miceli, 1985;Dworkin and Near, 1987,1997). It has been
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Ethical team
leadership
157
Journalof Financial Crime
Vol.24 No. 1, 2017
pp.157-175
©Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-02-2016-0012
widely accepted that the important business functions of whistleblowing lie in deterring and
detecting corporate wrongdoing and nancial misreporting by fortifying the instituted
legislation of this pro-social behavior both in and out of organizations (Schmidt, 2005).
In the preceding decade, following the collapse of Arthur Andersen in the Enron
debacle, whistleblowing within audit rms has taken on greater importance. Auditing is
a special profession. Given the profession’s requirements to be condential and
independent and to act in the public interest, there is a worldwide demand/need for a
framework that addresses specically the audit profession and auditors’ whistleblowing
on nancial frauds (Louwers et al., 1997).
China is the largest emerging market and economy in the world, and the development
of the young auditing profession in this country can be practically instructive to other
emerging markets. Based on a questionnaire survey on the six-month work placement of
trainee auditors in Chinese certied public accounting (CPA) rms, this study makes
contributions to the existing audit research literature by adding two business ethics
variables, i.e. trainee auditors’ likelihood of reporting client’s irregularities and
engagement team leader’s ethicality, to the theoretical framework for the studies of
whistleblowing in the audit profession. It also aims to improve both the quality of ethical
management in CPA rms and the practice-related effectiveness of work-integrated
education for accounting majors.
This paper focuses on testing the correlation between trainee auditors’ likelihood of
reporting client’s irregularities and engagement teams’ ethical leadership. Besides these
two key variables, this study also includes as explanatory variables into our testing
models, the organizational factors such as rm size and team size and the individual
factors such as trainee auditor’s reporting intent, gender and prior academic
achievements.
This paper documents the evidence that there is a signicantly positive correlation
between trainee auditors’ perception of their engagement team leader’s ethicality and
their likelihood of reporting client’s irregularities. Another conclusion is that female
trainee auditors are less likely to perceive their engagement team leaders as ethical,
although females, on average, are more likely to report the client’s irregularities to the
team leader than males in identical situations. The reporting intent concerning the CPA
rm’s relationship with its clients and the future job opportunity plays an important role
in determining trainee auditors’ likelihood of reporting client’s irregularities. Among
those control variables under investigation, team size is negatively correlated to the
dependent variable, whereas the others are observed to exercise no signicant inuence
on trainee auditors’ likelihood of reporting. This paper contributes to the audit research
literature by providing evidence on the signicant positive impacts of team leader’s
ethicality on the entry-level audit professional’s likelihood of reporting client’s
irregularities.
Following this introductory section, the rest of the paper proceeds as follows. The
second section introduces a brief history of Chinese audit profession development as the
institutional background for our survey design. The third section provides a review on
previous literature on the topics of whistleblowing and ethical leadership, succeeded by
a presentation of our research hypotheses. The fourth section introduces the research
methodology adopted in this study, including survey design, denition and
measurement of variables and regression models. The fth section displays the
empirical results through descriptive statistics, correlation matrix and regression
analysis. The sixth section presents the summaries and conclusions and states the
practical limitations of this study and some suggestions for potential further research.
JFC
24,1
158

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