Insight into the process of responsibility judgment of an audit failure

• DOI: https://doi.org/10.1108/IJAIM-06-2020-0083
• Pages: 67-90
• Published date: 01 September 2020
• Date: 01 September 2020
• Subject Matter: Accounting/accountancy,Accounting methods/systems,Accounting & finance
• Author: Siew H. Chan,Qian Song

Insight into the process of

responsibility judgment of an

audit failure

Siew H. Chan

Department of Accounting and Law, Mike Cottrell College of Business, University

of North Georgia/Thammasat University, Dahlonega, Georgia, USA, and

Qian Song

Department of Finance and Accounting, Saunders College of Business,

Rochester Institute of Technology, Rochester, New York, USA

Abstract

Purpose –This study tests a researchmodel for promoting understanding of the responsibilityattribution

process.

Design/methodology/approach –A between-subjects experiment was conducted to test the

hypotheses.

Findings –The results reveal that counterfactual thinking about how a system failure could have been

prevented moderates the effectof cause of misstatement on perceived control. Counterfactual thinking about

how an audit failurecould have been avoided also moderates the effect of perceivedcontrol on causal account.

Additionally, causal accountmediates the effect of perceived control on responsibility judgment of an audit

f‌irm. Inclusion of audit f‌irm sizeand auditor systems competency as control variablesin the hypothesis tests

and as groupingvariables in the invariance tests does not alterthe model results.

Research limitations/implications –Research can guide the audit profession on development of

innovative strategies for detecting fraud to protect the interests of decision-makers. Strategies can also be

devised to prompt users to consider relevant factors to enhance their ability to arrive at an accurate

assessmentof an audit f‌irm’s responsibility for an audit failure.

Practical implications –Regulators mayneed to address whether availability of advanced data analytic

tools increases the audit f‌irms’responsibility for presenting convincingevidence suggesting due diligence in

the audit work in the event of an audit failure.

Originality/value –This study examines the process variablesinf‌luencing responsibility judgment of an

audit f‌irm. Elicitation of counterfactual thoughts before the participants responded to the questions

measuring the process and dependent variables facilitates discernment of the intensity of counterfactual

thinkingon the variables examinedin the research model.

Keywords Perceived control, Causal account, Cause of misstatement, Counterfactual thinking,

Responsibility judgment

Paper type Research paper

1. Introduction

Previous research on causal attributionreports that a causal event inf‌luences responsibility

judgment (Naquin and Kurtzberg, 2004;Vaidyanathan and Aggarwal, 2003;Weiner,1992,

1995). However, cause of misstatement might not have a direct effect on responsibility

The f‌irst author would like to thank Thammasat University for supporting this research via the

Bualuang ASEAN Fellowship award.

Judgment of an

audit failure

67

Received7 June 2020

Revised7 August 2020

Accepted7 August 2020

InternationalJournal of

Accounting& Information

Management

Vol.29 No. 1, 2021

pp. 67-90

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-06-2020-0083

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

judgment of an audit f‌irm when the cause is attributed to external forces such as an

unknown system failure which results in the misstated f‌inancial statements. A direct

relationship may also not be observed between the cause of misstatement (critical error or

fraud) and responsibility judgment of an audit f‌irm because the auditee is directly

responsible for the misstatement.However, audit f‌irms are expected to face litigation risk in

the event of an audit failure (Goldwasser et al., 2008;Lowe et al., 2002). Thus, the present

study identif‌ies perceived control of an auditee over a misstatement, an audit f‌irm’s causal

account (explanation) and counterfactual thinking (about how a system failure and audit

failure, respectively, could have been avoided) as process variables that promote

understanding of the relationship between cause of misstatement and responsibility

judgment of an audit f‌irm. This approach is consistent with the suggestion of Grenier et al.

(2017) on the important implications of process variables in facilitating theoretical

developments (i.e.causal attribution theory in this study) and analyzes.

The media has reported actual causal events attributable to a human act or technological

failure (Chu, 2000;Lewis, 2000;Patrizio, 2017). Naquin and Kurtzberg (2004) developed a scenario

based on an actual event involving a collision of two commuter trains in Chicago (Nevala et al.,

2001). Extending this research, the current study focuses on how occurrence of a negative event (i.

e. an unknown system failure which corrupts the data) presents an opportunity for an

unintentional (critical error) or intentional (fraud) misstatement of the f‌inancial statements. While

errors are inevitable and indeed “to err is human”(Homsma et al.,2007), to this study’s

knowledge, one’s response toward a misstatement attributable to a critical error with a disastrous

outcome such as an audit failure has not been examined in the accounting context. Th e

accounting literature also does not seem to address the issue of whether a critical error or fraud

might elicit different reactions. Hence, this research investigates whether an unintentional or

intentional misstatement elicits different perceptions of an auditee’s control over the

misstatement. Additionally, two open-ended questions measuring two types of counterfactual

thinking (i.e. how a system failure and audit failure, respectively, could have been avoided) are

used to examine their moderating effects in the research model. Specif‌ically, individuals’reactions

toward failure at two different points in time are assessed to provide insight into responsibility

judgment of an audit f‌irm. First, an unknown source caused a system failure that corrupted the

data and presented an opportunity for an employee to use the corrupted data to prepare the

misstated f‌inancial statements either unintentionally (critical error) or intentionally (fraud). The

system failure provides a setting for investigating whether counterfactual thinking about how

this failure could have been prevented moderates the effect of cause of misstatement (critical error

or fraud) on perceived control. Since the system failure results in an audit failure, this study

examines whether counterfactual thinking about how an audit failure could have been avoided

moderates the impact of perceived control on causal account. Finally, despite the dominating

inf‌luence of perceived control in cognitions and behaviors (Harris, 1996;Weiner, 2000), the effects

of perceived control on behavior are paradoxical (Botti et al.,2009).To promote underst anding of

this issue, this research tests whether causal account explains the effect of perceived control on

responsibility judgment of an audit f‌irm.

An experiment was conducted to test the hypotheses. Cause of misstatement was

manipulated as unintentional (critical error) or intentional (fraud). Audit f‌irm size and auditor

systems competency were also manipulated to provide additional insight into the f‌indings.

Specif‌ically, audit f‌irm size and auditor systems competency were included as control variables

in the hypothesis tests and as grouping variables in the invariance tests to examine whether these

constructs inf‌luenced the model results. These variables are tested because empirical evidence in

the auditing literature suggests that they affect audit quali ty (Krishnan, 2003;Palmer et al.,2004;

IJAIM

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