jurnal_the impact of codes of ethics & experience on auditor judgments

The impact of codes of ethicsand experience on auditor

judgmentsGary Pflugrath

School of Accounting, University of New South Wales, Australia

Nonna Martinov-BennieDiscipline of Accounting, The University of Sydney, Australia, and

Liang ChenSchool of Accounting, University of New South Wales, Australia

Abstract

Purpose – The purpose of this study is to investigate the impact of the presence of a code of ethics onthe quality of auditors’ judgments, within the context of the new International Standard on QualityControls 1 (ISQC1).

Design/methodology/approach – A sample of 112 professional accountants and auditing studentswas employed to investigate the effect of the presence of a code of ethics (operationalised as thepresence vs absence of an organisational code of conduct) on the quality of audit judgments, pertainingto an inventory writedown, using a 2 £ 2 full factorial “between-subjects” experimental design.

Findings – The results of this study indicate that the presence of a code of ethics has a positiveimpact on the quality of the judgments made by professional accountants, but not on students. Thissuggests that it is the code of ethics, in the context of greater general experience that leads to higherquality of judgments.

Practical implications – The results suggest that the requirements of ISQC1 are relevant to thequality control of accounting firms and have potential to positively impact the quality of auditperformance.

Originality/value – This is the first paper to examine the impact of the presence of a code of ethicswithin an audit context. It is the first time that the interactive effects of the code of ethics and technicalcompetency, which together form an integral part of standard-setters’ quality control standards, uponthe quality of auditor judgments has been investigated.

Keywords Ethics, Competences, Auditing, Standards

Paper type Research paper

IntroductionRecent high-profile corporate collapses, such as Enron and WorldCom, have brought intoquestion the status and credibility of the accounting profession, especially auditors, “withallegations of accountants’ violations of public trust” (Chan and Leung, 2006, p. 436).In 1999, Steve Samek, Country Managing Partner, USA, for Arthur Andersen, talkingabout the firm’s independence and ethical standards, noted that “The day Arthur

The current issue and full text archive of this journal is available at

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The authors would like to acknowledge the support of the Institute of Chartered Accountants inAustralia for assistance during this study, as well as colleagues at the University of New SouthWales and The University of Sydney, and participants and discussant at the 2006 AFAANZConference, for their comments and feedback on the paper.

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Managerial Auditing JournalVol. 22 No. 6, 2007pp. 566-589q Emerald Group Publishing Limited0268-6902DOI 10.1108/02686900710759389

Andersen loses the public’s trust is the day we are out of business”. While all of the majoraccounting firms have been implicated with different corporate collapses and accountingscandals, it is Andersen which has since ceased to exist. A consequence of these apparentviolations has been increased government intervention in the regulation of the profession(Chan and Leung, 2006).

In an aim to restore public confidence, regulators have embarked on a number ofmeasures, including the introduction of new quality control standards (e.g. InternationalStandard on Quality Controls 1 (ISQC1, 2005)) for accounting firms, which prescribe bothethical and technical requirements. The importance of possessing both technical andethical competency is well illustrated by the alleged role of auditors in a number of theserecent high-profile corporate collapses, and highlights the point that auditors need to betechnical and ethical experts when auditing financial reports (Gaa, 1994). This studyaims to investigate the impact of one aspect of the ethical environment (i.e. the code ofethics) on the quality of auditors’ judgments, within the context of the new ISQC1.

The International Auditing and Assurance Standards Board (IAASB) has recentlyintroduced ISQC1[1], which aims to help firms establish a system of quality control foraudits and reviews of historical financial information as well as other assurance andrelated services engagements. The standard applies to all members[2] of theInternational Federation of Accountants (IFAC) and requires all firms to have policiesand processes in place to ensure their human resources are both technically andethically competent (ISQC1, p. 36). The purpose of the standard is to improve auditorperformance and audit quality by strengthening the ethical environment. Given thesignificant burden upon firms to comply with ISQC1 mandatory changes, there is needfor timely research on this standard.

The only relevant study to date (Booth and Schulz, 2004) appears to providesupport for ISQC1’s recommendations, by finding that an overall strong ethicalenvironment can significantly reduce the tendency of managers to continue failinginvestments. As Booth and Schulz (2004) is a management accounting study, theapplicability of this study to the auditing field is limited. Further research on theethical environment within an auditing context is therefore warranted.

The current study examines the impact that the presence (vis-a-vis absence) of afirm’s code of ethics has on the quality of auditor judgment. The firm’s code ofethics is chosen as the proxy for the ethical environment given that organisationalcodes of ethics have been made mandatory by ISQC1 for all accounting firms.Moreover, previous studies on codes of ethics have determined that the codes canaffect auditors’ ethical judgment (Jones et al., 2003; Herron and Gilbertson, 2004);however, none has extended this to consider the effect on auditors’ overall auditjudgment. Therefore, it is unclear how codes of ethics may affect audit judgments.

Participants (professional accountants and undergraduate auditing students)assuming the role of a senior auditor, were required to make inventory-writedownjudgments. Audit quality of the participants’ judgment was assessed by two measures:

(1) The likelihood of the subject discussing the audit issue with a supervisor(“likelihood”).

(2) The difference in the inventory adjustment amount that the subject believes tobe technically appropriate under the accounting standards, and the adjustmentamount that would be recommended to the supervisor (“difference”).

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Participants are expected to be positively impacted by the presence of a firm’s code ofethics (Douglas et al., 2001; Booth and Schulz, 2004) and therefore make higher qualityaudit judgments (i.e. less susceptible to clients’ preferences resulting in smaller“differences”) than those not in the presence of a code. Also, based on prior research(Noreen, 1988; Siegel et al., 1995; Wotruba et al., 2001), it is expected that participantspossessing greater general auditing experience (i.e. professional accountants) will alsomake higher quality judgments.

The interaction between general auditing experience (operationalised by auditorrank, and measured in terms of months of experience) and the presence (vis-a-visabsence) of a code of ethics was also investigated to determine whether the levelof experience impacts professional accountants in a manner which leads them toreact differently to the presence of the code than students.

The results provide some support for the predictions that both the presence(vis-a-vis absence) of a code of ethics, and greater general auditing experience, have apositive impact on audit judgment quality. While the presence of a code of ethics hadno significant impact on the participants’ awareness of the importance of the auditissue[3], it significantly enhanced the quality of the judgments of professionalaccountants, who recommended a smaller inventory writedown “difference” thanstudents, and professional accountants not in the presence of the code[4]. Students werenot significantly impacted by the presence of a code of ethics. This suggests that thepresence (vis-a-vis absence) of a firm’s code of ethics affects auditors’ judgmentperformance only on the condition of increased general auditing experience. One aspectof greater general auditing experience includes exposure to codes of ethics in aprofessional work environment (Wotruba et al., 2001), and this may be a possible driverof the difference between the quality of judgments made by professional accountantsand students.

Overall, the results support the standard setter’s belief that the ethical environment(specifically, the code of ethics) is an important factor in improving audit quality andprovide empirical support for ISQC1’s requirements. The results also suggest thataccounting firms may be able to improve the quality of auditors’ judgmentperformance by timely training and exposure of their employees to organisationalcodes of conduct and professional ethical principles.

Theory and hypothesis developmentAudit quality has been defined in a number of ways in accounting research. DeAngelo(1981, p. 186) defines audit quality as the “market-assessed joint probability that agiven auditor will both (a) discover a breach in the client’s accounting system, and(b) report the breach”. Other definitions have related the quality of an audit to:

. the audit’s ability to reduce noise and bias and improve fineness in accountingdata (Wallace, 1980);

. the probability that an auditor will not issue unqualified reports for statementscontaining material error (Lee et al., 1999);

. the accuracy of the information reported by auditors (Titman and Trueman,1986; Beatty; 1989; Davidson and Neu, 1993); and

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. the degree to which the audit conforms to applicable legal and professionalstandards (Aldhizer et al., 1995; Tie, 1999; Krishnan and Schauer, 2001; Francis,2004).

Given that an audit is the product of individual auditor judgments, the differentdefinitions of audit quality, to varying degrees, all encompass the notion of auditorcompetency (Watkins et al., 2004). In this study, auditor competency (equivalent toauditor expertise) is defined as the degree to which an auditor can apply, and complywith, the professional standards (i.e. auditing standards and the profession’s code ofethics). Thus, auditor competency is conceptualised as possessing both technical andethical dimensions, and audit quality is determined by both technical and ethical factors.

Ethical environment (code of ethics)[5]This study investigates how the strength of the ethical environment, as proxied by anorganisation’s code of ethics, impacts upon the quality of auditor judgment.

Libby and Luft (1993) suggest that the audit environment is a determinant ofdecision-making performance. Since, the ethical environment is a subset of the auditenvironment and auditors carry out their work in a value-laden environment (Dienhart,1995), organisational factors of the ethical environment may improve auditor judgmentby helping individuals determine “(i) issue(s) organisational members consider to beethically pertinent and (ii) the criteria they use to understand weigh and resolve theseissues” (Cullen et al., 1989, p. 51).

Prior research examining the ethical environment surrounding auditors is limited,with the majority of ethical auditing studies focusing on individual ethicaldevelopment and reasoning, and only on the ethical dimension of auditors’judgments (Jones et al., 2003). To date, there has been only one accounting studythat examined the ethical environment as a whole. Booth and Schulz (2004) conductedan experimental study investigating the effect the strength of an ethical environmenthas on managers’ economic decisions, as well as its interaction with the level of agencyproblem. Booth and Schulz (2004) varied the strength of the ethical environmentbetween strong and weak by providing information on six of the eight ethicalenvironmental factors considered by the Independent Commission Against Corruption(ICAC) in 1998[6]. The study found that a stronger ethical environment had a directeffect on managers’ project evaluation judgments, with managers under the strongerenvironment making decisions more aligned with the interests of their organisationunder both the presence and absence of agency-problem conditions.

In relation to the specific factors of the ethical environment, studies on codes ofethics have dominated the ethical accounting and auditing literature. Codes of ethicsare important since they implicitly set limits for unethical behaviour and are intendedto offer guidance in ambiguous situations. Codes of ethics can perform severalorganisational functions, such as making explicit the ethical values that werepreviously unstated or unclear, alert employees as to what actions are unethical andunpunishable, and help firms shift accountability of actions from the organisation tothe individual (Gellerman, 1989).

Survey studies have established that codes of ethics are thought to be relevant andimportant to organisations and their employees (Martinov, 2004; Lamberton et al.,2005). Lamberton et al. (2005) found that US firms that were more ethically concerned


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were more likely to possess a code of ethics and 90 per cent of the surveyed managersbelieved codes of ethics to be an important factor in resisting unethical behaviour.This echoes the earlier findings of Siegel et al. (1995), where surveyed internal auditorsthought of the profession’s code of ethics as a tool of ethical guidance, whoseeffectiveness increased as the auditors gained experience.

Brief et al. (1996) specifically examined the effect the presence of a firm’s code ofconduct[7] had on the frequency of fraudulent-financial reporting by executives andfinancial controllers and found no significant results. The subjects were given sevenrole plays requiring a decision of whether or not to misrepresent their firm’s financialstatements and found the occurrence of fraudulent reporting to be high regardless ofthe presence (vis-a-vis absence) of a code of ethics. The lack of positive relationshipbetween the presence of a code of ethics and individuals’ ethical behaviour is alsoreported by Laczniak and Inderrieden (1987) and Pater and Van Gils (2003). Laczniakand Inderrieden (1987) found the presence and endorsement of a firm’s code of ethics tohave little impact on the behaviour of managers (MBA students), and Pater andVan Gils (2003) reported a negative relationship between management consultants’ethical behaviour and their organisations’ possession of a written code of ethics.

In contrast, studies by Adams et al. (1995) and Barnett and Vaicys (2000) reportfindings that the presence of a code of ethics has a positive impact on ethical behaviour.Adams et al. (1995) surveyed certified practising accountants (CPAs) as to theirpersonal beliefs and ethical actions they would take for three scenarios relating toconfidentiality. The majority of the CPAs would follow the CPA code of professionalconduct when asked to resolve ethical dilemmas, even when the code might not reflecttheir own personal beliefs. This may be interpreted as a potential limitation of codes ofethics as they hinder the development of ethical reasoning of auditors (Jones et al.,2003), but compliance with codes of ethics should not be regarded as a negativeconsequence as codes are implicitly designed to create ethical behaviour whichconform to a pre-determined set of ethical values. This is suggested by Barnett andVaicys (2000), who found marketeers to be likely to engage in behaviour that isconsidered ethical from an organisational though not personal level when there is anorganisational code of ethics.

The results of research to date on the code of ethics and its impact on the ethicaldimension of auditor’s judgment are mixed, with no clear indication of how a code ofethics, as part of the ethical environment, may impact auditors’ judgments. The mixedfindings may be due to the lack of distinction made by prior studies between thepresence, and the reinforcement, of a code of ethics. The reinforcement of a code ofconduct was found to be significant on the judgment of managers (Booth and Schulz,2004), while an earlier study found no impact if the code was just presented withoutreinforcement (Brief et al., 1996). Furthermore, no auditing research to date hasaddressed the effect of the presence and reinforcement of a code of ethics on auditor’soverall judgment quality, despite explicit acknowledgment that auditor judgmentcomprises both ethical and technical dimensions.

The aim of standard-setters is to improve audit quality through an enhanced-ethicalenvironment. This aim, supported by the several research findings, suggests that thepresence of the code of ethics will have a positive impact on the quality of judgment.This is because a code of ethics can act as an ethical framework, and help ensureindividuals will behave within organisational and social expectations. Thus, it is

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expected that the presence of a code of ethics will have a favourable impact on thequality of auditors’ judgments:

H1. The presence of a code of ethics will elicit higher quality auditor judgments.

Technical competency (general-auditing experience)Technical competency is an individual ability and has been shown to be an importantdeterminant of decision-making performance and judgment quality. Based on research todate, common proxies for technical competency are experience (general and task-specific)and knowledge. General-auditing experience has been found to be positively related toauditors’ judgment performance when complexity of the audit task is taken intoconsideration (Abdolmohammadi and Wright, 1987; Libby and Tan, 1994; Shelton, 1999;Lin et al., 2003). For low-complexity tasks with well-defined routine solutions (i.e.structured tasks), auditors need to only exercise minimal judgment, and in suchsituations, general auditing experience is not a significant determinant of performance.

However, for more complex tasks requiring greater exercise of judgment (i.e.semi-structured and unstructured tasks), experience can improve performance byproviding the necessary skills and/or knowledge required to complete these tasks(Anderson and Wright, 1988; Bonner and Lewis, 1990; Anderson and Maletta, 1994).Furthermore, task-specific experience has been shown to be able to provide additionalimprovement to the quality of auditors’ judgments for semi-structured andunstructured tasks (Bonner and Lewis, 1990; Pincus, 1991; Libby and Tan, 1994;Wright, 2001; O’Reilly et al., 2004).

The other major determinant of technical competency is knowledge (Bonner andLewis, 1990; Libby and Luft, 1993; Tan and Libby, 1997). Knowledge has beenfound to be a stronger explanatory factor of performance than experience becauseexperience tends to impact indirectly on performance through knowledge (Libbyand Luft, 1993; Libby and Tan, 1994). Task-specific knowledge is particularlyhelpful in semi-structured and unstructured-audit tasks (Bonner, 1990; Bonner andLewis, 1990).

The task used in this study is a semi-structured task, for which higher qualityjudgments would be expected from those participants who have greater levels ofgeneral-auditing experience within a work environment. Also, it is a task that allparticipants would be expected to be able to complete, from a technical perspective.With this in mind, we have operationalised-technical competency as general auditingexperience. Task-specific experience and task-specific knowledge have been measuredto provide further insight into possible reasons for any significant differences, and toconfirm the assumption that all participants are technically competent in terms of therequirements of the task. Therefore, it is posited that greater general-auditingexperience will impact positively upon the quality of auditor’s judgments:

H2. Greater general-auditing experience will elicit higher quality auditorjudgments.

Interaction between the code of ethics and general auditing experienceWhile a stronger ethical environment may be created by the presence of a code ofethics, there has been no research examining the relationship between the ethicalenvironment and technical competency (general-auditing experience).


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Libby and Luft (1993) suggest that there are two types of interaction between anenvironmental factor and performance – an environmental factor may alter therequirements of the task (i.e. the ability, knowledge and/or effort required) and/oralter the amount or allocation of effort that decision makers are willing to employ tofulfil those requirements (i.e. changes motivation). In the first instance, a strongerethical environment would impose additional guidelines by which the auditors mustabide, so that their judgments are based on technical and ethical considerations. In thesecond instance, a stronger ethical environment may increase the effort auditors arewilling to expend on judgment-making, due to such concerns as accountability andrisk.

General-auditing experience is expected to be the dominant factor in determiningauditor performance in a semi-structured task, such as the task employed in this study,because semi-structured tasks provide limited alternative choices under accountingand auditing standards. This may restrict the permissible technical and ethical optionsavailable to the auditor.

However, Noreen (1988) suggests that ethical codes of conduct will only beeffective if they are bilaterally internalised by individuals as the monitoring ofbreaches of codes is difficult and costly. Furthermore, Siegel et al. (1995) suggest thatthe effectiveness of a code of ethics as a tool for ethical guidance, improves asauditors gained experience. Wotruba et al. (2001) proposes a positive relationshipbetween content familiarity of codes of ethics and their usefulness to managers.Familiarity with good corporate governance practices (including the existence ofcodes of ethics) in organisational settings leads to a higher level of internalisation,whether it be consciously or unconsciously. These results are contrasted with studiespertaining to those people who do not have a high level of audit experience; namelystudents. Fulmer and Cargile (1987) note that while exposing students to professionalcodes of conduct within their accounting courses leads them to perceiving ethicalissues more frequently, it has no significant impact on their actions. Furthermore,Wynd and Mager (1989) reported that students’ attitudes towards ethical decisions donot significantly change after having undertaken a business ethics course. Indeed, indiscussing ethics education, Armstrong et al. (2003) make the point that students’behaviour is unlikely to change simply through exposure to ethical issues, albeit anecessary part of the process.

Consistent with these findings, the following hypothesis is posited:

H3. The presence of the code of ethics will have a significantly greater favourableimpact on the quality of auditor judgments for professional accountants thanauditing students (i.e. in the presence of greater audit experience).

Research methodA 2 £ 2 full factorial “between-subjects” design was used to test the hypotheses. Twoindependent variables were:

(1) general auditing experience of the subjects (high or low); and

(2) the presence of a code of ethics (presence or absence).

The design yielded four experimental cells.

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ParticipantsThe study had two groups of participants, auditing students and accountingprofessionals. The participants (120 in total)[8] were randomly allocated toexperimental cells.

Auditing students were chosen as subjects, as prior studies have used this group toproxy for low-level auditing experience when studying auditors’ technical competencyand performance (Krogstad et al., 1984; Abdolmohammadi and Wright, 1987;Anderson and Wright, 1988; Marchant, 1989; Bonner and Lewis, 1990; Libby andFrederick, 1990; Tubbs, 1992; Anderson and Maletta, 1994; O’Reilly et al., 2004). Inaddition, their familiarity with codes of conduct within the work environment contextis much less that that of professional accountants. Depending on the extent to whichprofessional accountants have internalised and are familiar with the codes of conduct,the impact of the presence (vis-a-vis absence) of a code of conduct is expected to differbetween the students and professional accountants. The students were in the finalstages of an auditing and assurance course when the experiment was administered.The majority of students (51 of 60) had no practical auditing experience, and onaverage, the students had less than one month of general-auditing experience andvirtually no task-specific experience. However, importantly for this study, studentshad the necessary task-specific knowledge to complete the task (Table I), andthroughout their studies had been exposed to ethical professional requirements,including their importance and relevance in an auditing context. Recent studiessuggest that exposure to ethics and ethical instruction does make students moresensitised to ethical issues, thus more readily being able to perceive ethical issues thanif they have not received such instruction (Armstrong et al., 2003; Allen et al., 2005).

Professional accountants were selected to proxy for high general-auditingexperience, based on prior studies employing audit tasks similar to the currentstudy (Krogstad et al., 1984; Pincus, 1991). This group comprised both auditors andnon-auditors who had been attending the final focus session in the Institute ofChartered Accountants in Australia program (CA program)[9], with a minimum of two

Auditing students Professional accountants Total

ExperienceGeneral auditing experience (months)

Mean (standard deviation) 0.5583 (2.3937) 20.4600 (25.3588) 9.6045 (19.7810)Range 0-18 0-96 0-96N 60 52 112

Inventory writedown task-specific experience1


Task-specific knowledgeIndependent knowledge score (out of 10)


Notes: aThe response was measured by categories; 0, nil experience; 1, dealt with 1-3 times; 2, dealtwith 4-6 times; 3, dealt with 7-9 times; and 4, dealt with 10 or more times

Table I.Participants. Panel A:

descriptive statistics forparticipants’ technical

competency proxies


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years accounting experience. A majority of these participants were seniors, with anaverage of 20 months general-auditing experience, being significantly greater than thatof auditing students (Table I). In addition, the professional accountants have greaterinventory writedown task-specific experience than students (mean ¼ 0.9615 vs0.0667, respectively, based on a five-point scale measuring the number of times theyhad dealt with the particular type of issue being examined).

Both participant groups achieved a similar task-specific knowledge score (6.3269 foraccountants, 6.1667 for students, out of a maximum of 10), indicating that both groupshave sufficient technical knowledge to undertake the inventory writedown case, whichstrengthens the ability of the experiment to discern the impact that the code is havingon judgments. All participants were volunteers and no incentives were given.

Research instrumentThe research instrument is an adapted version of the “Babyboomers Inc.” case (Cohenand Trompeter, 1997) tailored by Martinov (2004) for the Australian-auditing context.The case is suitable for students and professional accountants, and is reflective of thebusiness environment of public accounting. The audit issue in the case study dealswith a potential material writedown of inventory. Prior research (e.g. Reckers andWong-On-Wing, 1991) has identified write off of stock and stock obsolescence issues tobe judgment based.

The case material consists of a background description of the client, includingkey-financial information[10], details of an audit issue involving potential materialwritedown of inventory, and two proposals for the treatment of this inventory, whichhad been discussed with the client. The background information also included auditmateriality of $2.5 million to ensure consistent interpretation of the materiality of thepotential writedown adjustment by subjects. All writedown adjustments based on thetwo proposals (other than the client’s current treatment of nil writedown) are material.

Pilot testingThe research instrument was tested and reviewed by three senior audit practitionersand an accounting academic. All three practitioners are technical directors/consultantsfor their respective organisations, with two also managing audit engagements inaddition to their technical role. The accounting academic was an ex-audit managerwith seven years of experience in a Big-4 firm. Questions were asked to elicit responsesas to the realistic nature and relevance of the background information and clarity of theinstructions and the questionnaire. Two audit research academics later reviewed therevised instrument as an additional quality check.

Independent variablesThere are two independent variables:

(1) The existence of the code of ethics is manipulated by varying thepresence/absence of an organisational code of conduct. The code of conductused was based upon the Joint Code of Professional Conduct of the ICAA andCPA Australia (Joint Code of Professional Conduct), which is the official coderecognised by the AUASB[11].

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(2) General auditing experience of the participants is operationalised firstly byaudit rank – auditing student or professional accountant. It is also measured bythe length of the auditing experience (months).

Four additional variables were measured. The first variable is the subjects’task-specific experience with inventory writedown (months); and the second, taskspecific knowledge (ten multiple choice questions, qualitatively similar to thoseemployed by previous audit expertise studies such as Bonner and Lewis (1990)). Thesewere measured in order to assess that all subjects had the requisite technicalknowledge to complete the task.

The last two variables were measured as prior studies found these to be significant inaffecting judgment performance. These variables include the subjects’ assessment of therisk of material misstatement in relation to the given inventory account (seven-pointLikert scale). Prior studies suggest that inexperienced auditors and students tend to bemore risk-averse relative to experienced auditors (Anderson and Wright, 1988;Anderson and Maletta, 1994). Also, Martinov (2004) found risk assessments to explainmuch of the variation in auditor judgment (partners and managers) in the “BabyboomersInc.” case utilised in this study. Finally, ethical awareness of the participants was alsomeasured as prior studies found this variable to moderate the effect of codes of conducton auditor behaviour (Cohen et al., 1993; Harrington, 1996).

Dependent variablesThe quality of auditors’ judgment is measured by two dependent variables:

(1) The likelihood that the participant would bring the inventory writedown issueto the supervisor’s attention (“Likelihood” measured on a seven-point Likertscale, ranging from 1 ¼ “Highly Unlikely” to 7 ¼ “Highly Likely”). Competentauditors should bring this issue to the attention of their supervisor because anadjustment to the inventory valuation is a significant audit issue and couldhave potential material impact on the financial statements. Furthermore,technically competent auditors would realise from the given financialinformation that the minimal adjustment required ($2.6 million) was beyondthe materiality threshold ($2.5 million).

(2) The difference between the inventory writedown amount that the participantbelieves to be technically appropriate under AASB (2005) 102 “Inventories” andthe amount that would be recommended to the supervisor in light of client’spreference for nil writedown (“Difference” ranging from “$0 million” to plus orminus “$15 million”). Expert consensus opinion suggests that no differenceshould be found between the “appropriate” and “recommended” adjustmentamounts. Of particular concern are judgments where the “recommended”adjustment is less than what the subject believed was technically appropriate, asthis would suggest reduced audit quality according to DeAngelo’s (1981)definition[12].

ProcedureThis experiment used an “in-basket” approach similar to that employed by Brief et al.(1996) who examined the impact a code of conduct has on fraudulent reporting in amanagerial context.


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Participants were randomly assigned to one of two relevant cells (presence/absenceof the code) and given a package containing a set of instructions, two envelopes, casematerial and a questionnaire with two separate parts. The instructions askedparticipants to assume the role of an audit senior, who was about to go on leave. Theywere also told that prior to their return from leave; an audit on which they are currentlyworking would be signed off (i.e. Babyboomers Inc.).

Participants were instructed to go through their in-tray in the short amount of timethey had before their departure. The in-tray consisted of a number of documents: the“Babyboomers Inc.” case; a brief one page memorandum containing amendeddefinitions of ethical principles (reproduced from the Code of Professional Conduct,Section B) contained in the firm’s code of conduct (for participants in the “presence ofcode” cells); and two filler items[13] (an expenses reimbursement form and an internalmemorandum discussing the firm’s Christmas party). The filler items were used tocreate a sense of realism and to disguise the experimental manipulations (Ueker et al.,1981; Connelly et al., 2004). Subjects were not required to make an immediate responseto any of the items except for the “Babyboomers Inc.” case. This provided the subjectsthe choice of whether to respond to the items in the in-tray, which helped to enhance therealism of the study. Schwartz (2001) found that the majority of employees in four largecorporations only skimmed through their firm’s code of conduct, with only a fewhaving read the entirety of the document. Therefore, strong emphasis on the code ofconduct would have been inappropriate, giving greater support for the “in-basket”approach that has been adopted.

In practice, senior auditors are often faced with time deadline pressure (Solomonand Brown, 1992; Kelley et al., 1999); therefore, to mimic this pressure and enhancerealism, all participants were informed that the tasks should take no more than15-20 min of their time. This was to create a realistic urgency for the completion of thetasks, with subjects required to balance the need for competent completion of tasks andthe upcoming leave. The majority of the participants did complete the task within15 min, with time spent by participants ranging from 10 to 20 min.

The questionnaire was organised into two parts. Part one contained the“Babyboomers Inc.” case, the code of conduct and the filler items. Following thecompletion of Part one, the material and questionnaire were sealed in an envelope. Parttwo elicited subjects’ demographic information, including their general andtask-specific auditing experiences. Subjects’ level of knowledge of inventoryvaluation and their ethical awareness[14] were also measured. A manipulation checkquestion was asked.

ResultsThe three hypotheses are discussed in terms of each dependent variable. The resultsare presented in Tables II-IV. Panel A of these tables shows the descriptive statisticsincluding the mean, standard deviation and the number of participants. Panel B showsthe results of the ANOVAs, while Panel C in Tables III and IV show the results ofcontrasts analyses.

Likelihood of discussing the inventory writedownThe results of ANOVA (Table II, Panel B) show a significant main effect for auditorrank (F ¼ 4.837, p ¼ 0.039), with professional accountants more likely to discuss the

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PanelA:descriptive

statistics

Ethicalenvironment

Levelof

auditingposition

Codeof

conduct

Students

Professionalaccountants

Total

Mean(standard

deviation)

NMean(standard

deviation)

NMean(standard

deviation)

NP

rese

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5.23

2(1

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5.78

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5.52

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Ab

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cod

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334

(1.2

29)

355.

854

(1.4

85)

245.

546

(1.3

52)

59T

otal

5.29

2(1

.256

)60

5.81

7(1

.411

)52

5.53

6(1

.350

)11

2PanelB:ANOVA

results

Sourceof

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Sum

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FP

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UB

J_G

R,

sub

ject

s’au

dit

ing

ran

k,

eith

eran

aud

itin

gst

ud

ent

ora

pro

fess

ion

alac

cou

nta

nt;

GE

N_

EX

P,

sub

ject

s’le

ng

thof

gen

eral

aud

itin

gex

per

ien

ce;

CO

DE

,th

ep

rese

nce

(vis-a-vis

abse

nce

)of

aco

de

ofco

nd

uct

Table II.“Likelihood” of

discussing the issue(what is the likelihood of

the auditor discussingthis issue with the

supervisor before goingon leave? 0, highly

unlikely; 7, highly likely)


577

PanelA:descriptive

statistics

Ethicalenvironment

Levelof

auditingposition

Codeof

conduct

Students


Total

Mean(standard

deviation)

NMean(standard

deviation)

NMean(standard

deviation)

NP

rese

nce

ofco

de

22.

912

(4.5

86)

252

0.53

6(1

.875

)28

21.

724

(3.2

31)

53A

bse

nce

ofco

de

22.

609

(4.5

58)

352

2.42

9(4

.779

)24

22.

536

(4.6

09)

59T

otal

22.

740

(4.5

33)

602

1.41

0(3

.615

)52

22.

120

(4.1

68)

112

PanelB:ANOVA

results

Sourceof

variation

(R2¼

0.050)

Sum

ofsquares

df

FP

CO

DE

17.3

321

1.02

10.

314

SU

BJ_

GR

44.7

511

2.63

90.

107

SU

BJ_

GR

* CO

DE

a33

.068

11.

950

0.16

5C

OD

E95

.143

16.

027

0.01

6*

GE

N_

EX

P56

6.73

521

1.71

00.

046

*

GE

N_

EX

P* C

OD

E10

2.79

37

0.93

00.

488

PanelC:contrastsanalysis–contrastof

“professionalaccountantsin

presence

ofcode”

withother

threecells

Valueof

contrast

df

TP

Ass

um

eeq

ual

var

ian

ce2

6.34

2610

82

2.34

40.

021

*

Notes:

* Sig

nifi

can

tat

the

5p

erce

nt

lev

el.

Des

crip

tion

ofv

aria

ble

sS

UB

J_G

R,

sub

ject

s’au

dit

ing

ran

k,

eith

eran

aud

itin

gst

ud

ent

ora

pro

fess

ion

alac

cou

nta

nt;

GE

N_

EX

P,s

ub

ject

s’le

ng

thof

gen

eral

aud

itin

gex

per

ien

ce;C

OD

E,t

he

pre

sen

ce(vis-a-vis

abse

nce

)of

aco

de

ofco

nd

uct

;ath

ein

tera

ctio

nte

rmre

mai

ns

insi

gn

ifica

nt

wh

enou

tlie

rsar

ere

mov

ed,

and

wh

enth

eyar

ew

inso

rise

dto

twic

eth

esi

zeof

the

stan

dar

dd

evia

tion

Table III.“Difference” betweeninventory writedownbelieved to be technicallyappropriate, and amountof writedownrecommended(recommended inventorywritedown lesstechnically appropriateinventory writedown 0,no difference; 15, increasein suggested amount;215, decrease insuggested amount)

MAJ22,6

578

PanelA:descriptive

statistics

Ethicalenvironment

Levelof

auditingposition

Codeof

conduct

Students


Total

Mean(standard

deviation)

NMean(standard

deviation)

NMean(standard

deviation)

NP

rese

nce

ofco

de

2.99

2(4

.532

)25

0.67

9(1

.827

)28

1.77

0(3

.546

)53

Ab

sen

ceof

cod

e2.

951

(4.3

38)

352.

513

(4.7

34)

242.

773

(4.4

68)

59T

otal

2.96

8(4

.382

)60

1.52

5(3

.567

)52

2.29

8(4

.071

)11

2PanelB:ANOVA

results

Sourceof

variation

(R2¼

0.055)

Sum

ofsquares

df

FP

CO

DE

22.0

351

1.36

90.

245

SU

BJ_

GR

51.9

041

3.22

50.

075

*

SU

BJ_

GR

* CO

DE

a24

.075

11.

496

0.22

4C

OD

E98

.077

16.

612

0.01

2*

GE

N_

EX

P54

0.45

821

1.73

50.

042

*

GE

N_

EX

P* C

OD

E10

7.02

37

1.03

10.

416

PanelC:contrastsanalysis–contrastof

“professionalaccountantsin

presence

ofcode”

withother

threecells

Valueof

contrast

df

tP

Ass

um

eeq

ual

var

ian

ce6.

4202

108

2.43

60.

016

*

Notes:

* Sig

nifi

can

tat

the

5p

erce

nt

lev

el.

Des

crip

tion

ofv

aria

ble

s,S

UB

J_G

R,

sub

ject

s’au

dit

ing

ran

k,

eith

eran

aud

itin

gst

ud

ent

ora

pro

fess

ion

alac

cou

nta

nt;

GE

N_

EX

P,s

ub

ject

s’le

ng

thof

gen

eral

aud

itin

gex

per

ien

ce,C

OD

E,t

he

pre

sen

ce(vis-a-vis

abse

nce

)of

aco

de

ofco

nd

uct

;ath

ein

tera

ctio

nte

rmre

mai

ns

insi

gn

ifica

nt

wh

enou

tlie

rsar

ere

mov

ed,

and

wh

enth

eyar

ew

inso

rise

dto

twic

eth

esi

zeof

the

stan

dar

dd

evia

tion

Table IV.Absolute value of the“difference” betweeninventory writedown

believed to be technicallyappropriate and amount

of writedownrecommended

(Recommended inventorywritedown less

technically appropriateinventory writedown 0,

no difference; 15,difference in suggested

amount)


579

issue with the supervisor (mean ¼ 5.817) than the auditing students (mean ¼ 5.292).This provides partial support for H2. However, the presence (vis-a-vis absence) of thecode of conduct had no significant effect on judgment (F ¼ 0.111, p ¼ 0.740).Therefore, H1 is not supported.

Other main (i.e. general-auditing experience) and interaction effects tested were notsignificant. Participants’ assessment of the risk of material misstatement (F ¼ 3.176,p ¼ 0.078) was significant, with participants more likely to discuss the issue with thesupervisor if they assess the risk of material misstatement to be high.

Difference between the technically “appropriate” and “recommended” inventorywritedown[15]Figure 1 shows that the majority of subjects did not reduce or increase the technically“appropriate” inventory writedown amount when they provided a recommendation tothe supervisor (i.e. difference is zero). However, for the majority of participants whomade adjustments the difference was negative (i.e. the “recommended” writedown wasless than what they believe to be technically “appropriate”).

The ANOVAs (Table III, Panel B) report a significant main effect for the presence(vis-a-vis absence) of a code of conduct (F ¼ 6.027, p ¼ 0.016), when general-auditingexperience is measured in terms of length of experience (rather than operationalised byauditor rank), with subjects in the presence of the code having a smaller difference injudgments (mean ¼ 21.592) than those without the presence of a code(mean ¼ 22.579). This provides partial support for H1. General-auditing experiencewas also significant (F ¼ 1.710, p ¼ 0.046), with a smaller difference between the two

Figure 1.Frequency of “differences”between inventorywritedown believed to betechnically appropriateand recommended

–14.40

–14.00

–11.00

–10.00

–9.00–8.00

–7.50–7.00

–5.00–3.50

–3.00–2.50

–2.00–1.00

–0.900.00

1.002.00

4.00

Difference between the 'recommended' and technically 'appropriate' writedown amounts

0

20

40

60

80

Cou

nt

MAJ22,6

580

judgments for more experienced subjects, providing support for H2. General-auditingexperience, operationalised as auditor rank, was not significant.

While the interaction between auditor rank and the presence/absence of the code didnot show as being significant using ANOVA, descriptive statistics (Table III, Panel A)highlight that the “differences” for professional accountants in the presence of a codevary greatly from the other three cells. As discussed in Buckless and Ravenscroft(1990), contrasts analysis is a more appropriate form of analysis than ANOVA, whenthe results (and hence expected interactions) are in the form hypothesised (and shown)in this study. Contrasts analysis (Table III, Panel C) shows that these “differences”(mean ¼ 20.536) are significantly smaller than the “differences” reported for the otherthree cells (t ¼ 22.344; p ¼ 0.021). This supports H3. Refining the analysis in order tocompare individual cells shows that the “differences” reported by professionalaccountants in the presence of the code, are significantly smaller than the “differences”reported by:

. professional accountants in the absence of a code (F ¼ 3.735, p ¼ 0.059); and

. auditing students in the presence of a code (F ¼ 6.343, p ¼ 0.015).

This is shown graphically at Figure 2.Absolute values of the “difference” between the technically “appropriate” amount

and the “recommended” judgments were also analysed. Absolute values werecalculated because both positive and negative differences were found in the data, andwhen analysed, the positive and negative differences would have cancelled each other.ANOVAs (Table IV, Panel B) report a significant main effect for the presence (vis-a-visabsence) of a code of conduct (F ¼ 6.612, p ¼ 0.012), when general-auditing experienceis measured in terms length of experience (rather than operationalised by auditor rank),

Figure 2.Means of “differences”

between inventorywritedown believed to be

technically appropriateand amount of writedown

recommended

–0.50

–1.00

"Dif

fere

nce"

bet

wee

n ju

dgm

ents

('rec

omm

ende

d' m

inus

tech

nica

lly'a

ppro

pria

te') –1.50

–2.00

–2.50

–3.00

Auditing Students Proffessional Accountants

Proffessional Accountants and Students

Presence(absence) of Code

Absence of CodePresence of Code


581

thereby providing partial support for H1. Furthermore, there was a significant maineffect for auditor rank (F ¼ 3.225, p ¼ 0.075) and the general auditing experience(F ¼ 1.735, p ¼ 0.042), providing strong support for H2. In general, the results suggestthat general-auditing experience improves the quality of auditors’ judgments, withprofessional accountants (mean ¼ 1.525) reporting smaller “differences” thanauditing students (mean ¼ 2.968).

Consistent with the previous discussion on “differences” contrasts analysis(Table IV, Panel C) shows that the “absolute values of differences” reported forprofessional accountants in the presence of a code (mean ¼ 0.679) are significantlysmaller than for the other three cells (t ¼ 2.436; p ¼ 0.16). Specifically, they aresmaller than the “differences” reported for professional accountants in the absenceof a code (F ¼ 3.589, p ¼ 0.064), and those reported for auditing students inthe presence of a code (F ¼ 6.183, p ¼ 0.016) (Figure 3). These results support H3.

Therefore, the presence of a code improved the judgment quality of the professionalaccountants, but had little impact on the students, who had similar results in both thepresence and absence of the code (Tables III and IV, Figures 2 and 3).

Additional analysisAuditors and non-auditors. Using only the data from the professional accountants, thejudgments of auditors (n ¼ 24) and non-auditors were compared (n ¼ 28). For thejudgment on the “likelihood” of discussion of the audit issue, there were no significantdifferences between the two groups. The presence (vis-a-vis absence) of a code ofconduct and its interactions with general-auditing experience was not significant.

For the “difference” dependent variable, the code of conduct had a significant maineffect (F ¼ 4.480, p ¼ 0.040) on judgment. The average difference in judgments wassmaller for non-auditors for both treatments, but was not significant. The results of theanalysis of the absolute differences are qualitatively the same. This indicates that thepresence of the code of ethics has a favourable impact on the judgments of professionalaccountants, regardless of whether they are audit, or non-audit, professionals.

Figure 3.Means of absolute value of“differences” betweeninventory writedownbelieved to be technicallyappropriate and amount ofwritedown recommended

3.00

2.50

1.50

0.50

2.00

1.00

Abo

sulte

val

ue o

f "d

iffe

renc

e" b

etw

een

judg

men

ts (

'reco

mm

ende

d' m

inus

tech

nica

lly 'a

ppro

pria

te')

Auditing Students Proffessional Accountants

Proffessional Accountants and Students

Presence(absence) of Code

Absence of CodePresence of Code

MAJ22,6

582

Big 4 and Non-Big 4. To test whether participants from Big 4 firms provide betterquality audit judgments than those from Non-Big 4 firms, the professional accountantsgroup was divided into the Big 4 (n ¼ 30) and Non-Big 4 (n ¼ 16). There was nosignificant main or interaction effect for the “likelihood” variable.

The results for the “difference” variable in the presence of the code was significantlysmaller than those not in the presence of the code (F ¼ 5.612, p ¼ 0.023). A similarresult is reported for the absolute value of “differences” (F ¼ 5.594, p ¼ 0.023). This isconsistent with the results shown for the previous analysis of audit, and non-audit,professionals. Furthermore, there was a marginally significant interaction between thecode of conduct and the accounting firm (F ¼ 2.927, p ¼ 0.094) for the absolute“difference” variable. This result appears to be driven by the much larger “differences”for Non-Big 4 participants in the absence of a code[16].

Treatment of the code of conductThe research instrument also asked participants who received a code of conduct howthey dealt with the code. There were no significant correlations (using one-tailedPearson correlations) between the use of the code and the “difference” variable for allparticipants. However, there was a significant correlation ( p ¼ 0.041) for professionalaccountants, but none for students. This suggests that the greater attention paid to thecode by professional accountants may contribute to the improvement in judgmentquality.

Discussion and conclusionThe aim of this study was to examine whether the presence (vs absence) of code ofethics has an impact on audit quality. This was motivated by the recent introduction ofthe new ISQC1, which requires all accounting firms to implement policies andprocesses to ensure employees’ technical and ethical competence. Professionalaccountants and auditing students (as proxies for high and low general-auditingexperience) were asked to make a number of audit judgments in relation to aninventory writedown task, with aggressive client preferences already indicated. Theresults of the current study suggest that the presence (vis-a-vis absence) of a code ofconduct can improve the quality of auditors’ judgments.

The presence (vis-a-vis absence) of a code of conduct had no significant effect on theparticipants’ decision on the likelihood of discussing the inventory writedown with asupervisor. Rather, the quality of this auditor judgment was explained by thegeneral-auditing experience of the subjects (auditing rank) and the subjects’assessment of risk of material misstatement. The professional accountants weresignificantly more aware of the seriousness of the audit issue and thus were more likelyto discuss the issue. Furthermore, high-risk assessments were associated with greaterlikelihood of discussion.

However, the presence of a code of ethics appears to have a significant influence onthe audit judgments of professional accountants. The professional accountants weresensitive to the presence (vis-a-vis absence) of a code, whereby the difference betweenthe recommended and appropriate inventory writedown was significantly smaller forjudgments made in the presence of the code. In contrast, auditing students appear to begenerally unaffected by the presence of a code. Furthermore, the presence of the codeappears to significantly improve the judgments made by those with greater


583

general-auditing experience. These differences in effects may be due to differences inthe degree of familiarity that professional accountants and auditing students (and alsothose with greater general auditing-experience, and those without such experience)have with codes of ethics (Wotruba et al., 2001), as the work environment of theprofessional accountants would provide them with significantly greater contact withcodes of ethics than the work and study environment of the auditing students.

Overall, these results support the findings of Booth and Schulz (2004), andcontradict the arguments of Dillard and Yuthas (2001) who argue that codes of ethicsare only marketing tools used to legitimise organisations and cannot influenceindividual behaviour.

Additional analyses of the judgments of the professional accountants suggest thatboth auditors and non-auditors are equally affected by the presence (vis-a-vis absence)of a code of conduct. Both groups had significantly smaller differences between thetechnically “appropriate” and the “recommended” inventory writedown amounts whenin the presence of a code of conduct. When the professional accountants are partitionedinto Big 4 and Non-Big 4 groups, both groups reacted positively to the presence of acode, with those in the presence of a code having on average a smaller differencebetween judgment amounts than those not in the presence of a code. There was aninteraction between the code of conduct and audit firm type, as Non-Big 4 accountantshad on average a larger difference between the two judgment amounts than Big 4accountants in the absence of a code of conduct[17]. This is consistent with priorresearch that uses Big 4 as a proxy for higher audit quality. Big 4 firms are likely tohave stronger ethical environments in terms of the presence of formal codes of conductand relevant training, resulting in increased familiarity of codes for staff within a Big 4firm. In turn, this leads to a presumption of higher quality judgments in the absence ofthe code for participants from Big 4 firms, compared to those from the Non-Big 4 firms.

Overall, the results of the study provide support for the introduction of writtencodes of conduct at the firm level, as required by ISQC1. The fact that auditingstudents, unlike the professional accountants, were not affected by the presence(vis-a-vis absence) of a code of conduct suggests that the usefulness of codes of conductdepends upon users’ familiarity with such codes. Therefore, accounting firmsinterested in improving audit quality should consider formally exposing theiremployees to codes of conduct through formal training, as well as audit aids such asthe inclusion of checklists and/or audit program steps on all engagements. Tertiaryeducation auditing courses, and CA and CPA programs, should also considerbroadening students’ exposure to codes of conduct by strengthening the emphasis onethical principles and their significance in the auditing process.

The findings of this study must be considered in the light of the followinglimitations. Firstly, the use of an experimental design reduces the external validity ofthe study as not all information normally considered by auditors was presented in thecase study. However, the internal validity of the study is strengthened by theexperimental method and by use of an existing research instrument (developed byCohen and Trompeter (1997), adapted to, and tested in, the Australian auditing contextby Martinov (2004)). Secondly, the study did not control for firm-specific differences(e.g. training, decision tools and audit approach) which may influence the judgmentperformance of the professional accountants (Bonner, 1990). Differences in corporatecultures between firms may impact upon the judgments made by professional

MAJ22,6

584

accountants, for as noted by Chen et al. (1997), what is perceived as being “correct” or“moral” is often defined by the environment within which decisions are made. A finallimitation relates to the independent-knowledge test used to measure task-specificknowledge, which had to be created specifically for this study. However, the test issimilar to those used in previous studies measuring task-specific knowledge (Bonnerand Lewis, 1990; Libby and Tan, 1994; Tan and Libby, 1997), and had been pilot tested.

This appears to be the first study to date to examine the effect the presence of a codeof ethics has on the quality of auditors’ judgments. Given the significant findings ofthis study, future research into other factors of the ethical environment suggested byISQC1 (e.g. leadership and management influence) could be explored. Another avenueof research is to extend the current study and investigate the impact of reinforcement,in addition to the presence, of a code of conduct on auditors’ judgment quality.Previous studies have suggested that reinforcement of codes of conduct by firms mayproduce additional significant effects (Laczniak and Inderrieden, 1987; Brief et al.,1996). Lastly, similar studies could be undertaken for a wider range of auditingexperience, such as audit managers and partners.

Notes

1. This standard has been incorporated by the Australian Auditing and Assurance StandardsBoard (AUASB) into the revised Auditing Professional Statement (APS) 5 “Statement ofQuality Control of Firms” effective 31 December 2005. The Accounting Professional andEthical Standards Board (APESB) was established by CPA Australia and the Institute ofChartered Accountants in January 2006. The first standard issued by the Board, APES110,was entitled “Code of Ethics for Professional Accountants”. Its contents cover the keyaspects of ISQC1 and APS5.

2. IFAC members include CPA Australia, The Institute of Chartered Accountants in Australia,National Institute of Accountants in Australia, and New Zealand Institute of CharteredAccountants.

3. The technical competency of the participants as measured by auditor rank had a positiveimpact on the likelihood of participants discussing the audit issue with a supervisor (i.e.professional accountants are more likely to discuss the issue than the auditing students).General-auditing experience did not have a significant impact on the likelihood of discussionof the issue with supervisor.

4. Additional separate analyses of the impact of the presence (vis-a-vis absence) of a code ofethics on the individual-audit judgments of the technically correct inventory writedownamount and the amount to be recommended to the supervisor were performed. The resultswere not significant.

5. In line with discussion with accounting firms and the latest standards, the term “Code ofConduct” is used more often than the term “Code of Ethics” and as such we have used theformer in the research instrument and in aspects of the general discussion in this paper. Wehave continued to use the term “Code of Ethics” as it relates to (and is described in) theacademic research on this topic.

6. The six factors are mission and values, leadership and management influence, peer groupinfluence, procedures, rules and codes of ethics, ethics training, and rewards and sanction.These factors are chosen because they directly relate to the creation and operation of anethical environment (Booth and Schulz, 2004).

7. Codes of ethics at the organisation level are generally referred to as codes of conduct.


585

8. Five participants failed the manipulation check and three participants omitted to completeone or more of the dependent variables, resulting in a final adjusted sample of 112. Thesample size also varies between the tests as some of the participants in the final sample of112 did not complete all of the questions in the instrument. Only their completed answerswere used for the relevant analyses.

9. The candidates were attending the final focus session in their final CA module (integrative orCAI module) and had already successfully completed all the technical modules in the CAprogram, including the Financial Reporting and Audit and Assurance (FRA) module.

10. Financial information provided was actual and forecasted sales, gross margin, profit beforetax, net profit, inventory balance and selected ratios, and industry inventory turnover ratio.

11. Joint Code of Professional Conduct of the Institute of Chartered Accountants in Australia andCertified Practicing Accountants Australia, Melbourne, 2005

12. DeAngelo (1981) had defined audit quality as the market-assessed joint probability that anauditor can (a) discover the breach; and (b) report the breach. By analogy, the individualauditors’ judgment quality relies on the auditors being technically competent and neutral toall influences (e.g. client preference).

13. Each item was stapled separately and the order of presentation was randomised in theinstrument.

14. The order of the ethical orientation questions was not randomised but the poles of somequestions were switched.

15. Individual analysis was carried out for the two judgments – the technically “appropriate”inventory writedown amount and the “recommended” inventory writedown amount. Theindependent variables were not significant, though individual ethical awareness is positivelysignificant for the “recommended” writedown amount judgment.

16. These results should be read with caution, given the small size of some of the cells beinganalysed.

17. These results should be read with caution, given the small size of some of the cells beinganalysed.

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Corresponding authorGary Pflugrath can be contacted at: [email protected]


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