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The comfort theory revised How client types influence auditors’ comfort levels Student: Liselotte de Zoete Student Number: 6042074 Date: 22-06-2015 Education: MSc Accountancy and Control, Accountancy track Institution: University of Amsterdam, Faculty of Economics and Business Supervisor: Dr. G. Georgakopoulos Total words: 15.885

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Page 1: The comfort theory revised How client types influence

The comfort theory revised

How client types influence auditors’ comfort levels

Student: Liselotte de Zoete

Student Number: 6042074

Date: 22-06-2015

Education: MSc Accountancy and Control, Accountancy track

Institution: University of Amsterdam, Faculty of Economics and Business

Supervisor: Dr. G. Georgakopoulos

Total words: 15.885

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1. Statement of originality

This document is written by Liselotte de Zoete, who declares to take full responsibility for the

contents of this document. I declare that the text and work presented in this document is

original and that no source other than those mentioned in the text and its references have been

used in creating it. The faculty of Economics and Business is responsible solely for the

supervision of completion the work, not for the contents.

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2. Abstract

Purpose: This paper provides empirical evidence on comfort as a ritual as researched by

Pentland (1993). Specifically what influences different client types have on the comfort of the

auditor in a financial audit engagement. The creation of comfort is examined from the

auditors point of view.

Design/methodology/approach: For the purpose of this paper an interpretative case study

was conducted at PwC in the Netherlands. Data was gathered from interviews with 9 auditors

from PwC through participant observation.

Findings: Comfort is still an important factor in a financial audit engagement. Clients play a

large role in the creation of comfort and this differs per industry and size of the client. All

three types of comfort creation, state sense, relief sense and renewal sense, were impacted,

positively and negatively.

Research limitations: The limitations of this research are primarily found in the limited

amount of time and amount of interviews available for research and the difficulty of

generalizing the findings of one specific case study in a specific contextual setting. But it is

also important to keep in mind that there is a language barrier that could influence the results.

Originality/Value: While the comfort theory plays an important role in the audit profession,

it still is largely under-researched and there is a need for more societal research in auditing.

This research aims to fill a research gap, by studying the influence of client types on the

comfort levels of auditors

Key words: Comfort theory, Audit ritual, Pentland, Client types.

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Table of Contents

1. Statement of originality 2

2. Abstract 3

3. Abbreviations, definitions & list of tables 6

3.1. Abbreviations 6

3.2. Definitions 6

3.3. Tables 6

4. Introduction 7

5. Literature review 11

5.1. Comfort theory 11

5.1.1. Origination of Comfort theory 11

5.1.2. Comfort Theory and legitimacy 13

5.1.3. Comfort framework 15

5.2. Client types 16

5.2.1. What are client types? 16

5.2.2. Client size and their influence on the audit process 17

5.2.3. Client risk 17

5.2.4. Tenure 18

5.2.5. Industry type 19

6. Methodology 20

6.1. Importance of qualitative research 20

6.2. Data collection 21

6.3. Case design 22

6.4. Case analysis 25

7. PwC : the case context 27

7.1. PwC and its client types 27

8. Findings 29

8.1. State sense 29

8.1.1. Size 32

8.1.2. Industry 33

8.2. Relief sense 34

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8.2.1. Size 35

8.2.2. Industry 36

8.3. Renewal sense 37

8.3.1. Size 40

8.3.2. Industry 40

9. Discussion and Conclusion 42

10. Reference list 45

11. Appendix 1: Interview guide 50

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3. Abbreviations, definitions & list of tables

3.1. Abbreviations

F.S = Financial Services

CIPS/TICE = consumer product industry

EU & M = Energy, Utilities en Mining

PS/PC = Public sector & private companies

S.A. = Senior associate

3.2. Definitions

EGA = PwC working paper

R.A. = register accountant, Dutch version of CPA

AURA = PwC audit Framework

3.3. Tables

Table 1: interviewee selection

Table 2: coding scheme

Table 3: framework

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4. Introduction

Auditing has evolved greatly over the course of the last decades: from small offices that

practice bookkeeping to large firms that perform financial and non-financial audits. The non-

financial audit has taken a steep rise in the last couple of years. CSR reporting, integrated

reporting and many more non-financial assurance practices have been introduced and have

given auditing a whole new platform (Ellerup Nielsen and Thompson, 2007). But this does

not mean that financial reporting is of less importance. Even though the world is changing,

financial statements still have to be checked. And even though financial auditing has been

around since Victorian times, this does not mean that all has been researched.

An audit is finished when all the working papers are filled out and the partner signs

the report (PwC guidelines, 2015). But when does an auditor feel that he has given enough

assurance? And what role does team interaction play in an audit? These are all questions that

Pentland (1993) asked himself. That is why Pentland (1993) started his research on micro-

sociological concept of the interaction ritual. Here Pentland focused on the process of

auditing rather than the outcome and this made him one of the first that saw auditing as a

ritual and combining it with the comfort theory. In his research he looked at audit as a ritual.

With ritual he refers to: ‘any collective activity that has the effect of maintaining social order,

no matter how commonplace or mundane it may seem’.

When analyzing rituals it is a question of interpretation, Pentland used Moore and

Myerhoff’s (1977) five layers of rituals for his research. By interpreting auditing as a ritual,

it looks at the social context of the audit. Pentland (1993) concludes that audit rituals produce

comfort, and comfort is used as a commodity within an engagement team and the investment

community as a whole. The audit engagement ends with a signature, which is regarded as

“sacred”, it signifies completion, purity and of course, comfort.

Other researchers used Pentland’s work to review societal view in auditing as well.

Power (2003) for example researched auditing and the production of legitimacy around four

themes: the audit process and formal structure; auditing as a business, working papers and

image management; and new audits. He mentioned that there is very little known about

auditing in practice while accounting and its components (like, standard costing and ABC)

have been researched to every detail. He uses Pentland’s (1993) paper to describe social

construction of the audit process and to illustrate the importance of image management. An

example that Pentland (1993) gives is that who does the work is as important as what is done.

And as Power (2003) concludes: ‘auditing is far from being a self-evident set of techniques

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which require occasional improvement but it is rather a series of hopes and aspirations

inscribed in its most mundane routines.’

Carrington and Catásus (2007) continue with researching the sociological strand of

auditing. They carry on Pentland’s idea of auditing as a ritualistic process of producing

comfort at the micro-level and investigate the notion of auditing as a comfort producing

activity . They mention different levels of comfort that can be found in Kolcaba and

Kolcaba’s (1991) research in the nursing industry. The nursing industry is where the comfort

theory once all started. They transformed the Kolcaba and Kolcaba (1991) levels of comfort

into a comfort framework for auditing. The conclusion of their study is that the effort to

produce comfort necessitates an effort to find and relate to discomforts. Also the comfort

theory provides a language to discuss achieving maximal assurance.

One of the factors that play a big role in audits is the client. The client hires the auditor

and can be a determining factor on the quality of the audit (Chen et al., 2010). When an

auditor starts auditing a new client, he has to do a lot of research that one does not do at a

former client (Carey and Simnett, 2006).

There has been a lot of research done on the influence clients have on audit quality.

Deangelo (1981) is one of the first that researched auditor independence in combination with

client importance. She found that client importance is related to an auditors incentive to

compromise his independence. This is related to quasi-rents, quasi-rent occur when specific

start-up costs are made. Because of this start-up costs the auditor can ask more for the audit

but at the same time has an incentive to act opportunistic regarding the client. Because he

knows that the client now has transfer costs if switching to another auditor, so this allows him

to ask more for his audit as long as it does not exceed the transfer cost.

Chung and Kallapur (2003) continue on this premise and investigate the economic

theory of Deangelo (1981) by using ratios of client fees and of non-audit fees and divide

these by the audit firm's U.S. revenues or a surrogate for the audit-practice-office revenues as

measures of client importance. They conclude that there is no significance between auditor

independence impairment as a function of different client fee ratios. And this contradicts

DeAngelo’s (1981) research.

Chi et al. (2012) investigated the effect of client importance in a Taiwanese setting

where audit partners are required to sign audit reports to examine whether audit partners

compromise their independence for economically important clients. They made a difference

between Big N audit and non-big N auditors. They concluded that big N auditors did not

comprise their independence but non-big N auditors did.

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However, the role of the client has not been researched in combination with the

comfort theory before. Also Carrington and Catásus (2007), who did the most recent

research on the comfort theory have suggested this subject explicitly: “It is possible that the

different perspectives on relief, state and renewal relate to what kind of client the seniors

were working with. We did not use this variable and this could be a possibility for future

research.” That is why the research question of this thesis is:

“In what way do client types influence the comfort levels of an auditor?”

The aim of this paper is to provide information if and how clients impact the comfort

levels of auditors and how it differs per client type. To achieve this goal a qualitative case

study is taken where auditors of a Big-4 auditing firm in the Netherlands will be interviewed.

The interviews will be held among public accountants at PwC, who have completed

their studies and have working experience in the auditing field for a number of years. By

engaging auditors in interviews, auditors were given the opportunity to reflect in detail on the

influence of client types on their comfort levels. Also by doing a case study research it

answers to the demand for more qualitative research on accounting subjects (Cooper &

Morgan, 2008).

There has not been a lot of research done on the comfort theory (Carrington and

Catásus, 2007; Power, 2003). However, it can help contributing to not only the sociological

strand of audit research, it may also shed a light on other fields of research (Carrington &

Catásus, 2007). This study will bring a fresh view to the extensive research done on the

impact of clients on audits. This time it will not be the impact of the quality of the audit, or

the audit from a client’s perspective but how the client influences the comfort of an auditor.

The study will research auditors of financial audits rather than non-financial audits

because of the objectiveness of financial auditing. The combination of the objective with the

subjective should ensure interesting results. Also all former comfort theory research

(Carrington and Catásus, 2007; Pentland, 1993; Power, 2003). has been done in a financial

audit setting. So to extend the findings of previous research (Carrington and Catásus, 2007;

Pentland, 1993; Power, 2003) this research also takes place in a financial audit setting.

This paper will hopefully lead to a better understanding of the comfort theory and

increase the importance of acknowledging the comfort theory and other societal audit

research. Furthermore, the present study also intends to close a research gap, as identified in

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the paper of Carrington and Catásus (2007, p.53) and may also be a trigger for further

research on the comfort theory.

The remainder of this study will be structured as followed. First, the literature review

will go into more detail about the comfort theory and client types. The methodology will

describe the importance of qualitative research and how the research will be conducted. This

is followed by the case analysis and it findings. The findings will be divided in changes

compared to former research and how client types have influenced the comfort theory . The

research concludes with a summary of key findings and contributions, limitations of the

research and some suggestions for future research.

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5. Literature review

This section will provide an overview of the relevant theoretical insights, extracted from the

existing literature. The first part will discuss both quantitative and qualitative research papers

on creating comfort in auditing. Although the literature review presents the comfort theory in

a variety on contexts, this paper will primarily focus on creating comfort during an audit and

its relation with the client. Subsequently, this literature review will thrive to create a deeper

understanding on client types.

5.1. Comfort theory

5.1.1. Origination of Comfort theory

Pentland (1993) is one of the earlier writers examining the creation of comfort in the

process of auditing. He wanted to give an alternative view on auditing, by offering an

interpretive approach to auditor behavior that emphasizes the social and contextual aspects of

the work. Pentland (1993) did field observations of two audit engagements and used Collins’s

(1981) theory of interaction ritual chains to create a new theory about micro-level

interactions within an audit team and its effect on macro-level of auditing. Pentland (1993)

wanted to contribute to the understanding of the audit ritual on both empirical as theoretical

grounds. This results in a better understanding of the social construction of the audit process.

By focusing on the micro-sociological perspective offers a completely different view of

formatting an audit opinion. Pentland (1993) is of opinion that micro-interactions within the

engagement team create comfort, which makes the order of macro-level of capital markets

and other financial institutions.

Professional auditing standards speak of “risk of misstatement” and obtaining

“assurance”, (Vera-Muñoz, et al., 2014) while according to Pentland auditors speak in terms

of comfort. Numbers do not speak for themselves and auditors give a meaning to them. By

using emotional language for a relatively rational process, auditors give an important layer of

meaning to their work. By using audit rituals the clients data can be transformed into “clean”

data and can make the auditor comfortable (Pentland, 1993).

Pentland (1993) sees auditing as an interaction ritual among auditors to create comfort

for the engagement team, the audit firm and finally the public. Collins (1981) implemented

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the interaction ritual as an approach to understand macro-level phenomena in a micro-level

way. Collins (1981) is of the opinion that the emotional part, rather than the rational part, is

main process through which social order is constructed. Something which Pentland agrees

upon in the process of auditing.

As mentioned before, Pentland (1993) researched team interactions during an audit.

Within the teams, comfort was traded as a commodity and up the chain of command.

Pentland (1993, p. 610) even mentions that a partner does not achieve comfort by reviewing

working papers but by repeated interactions with members of his team. And comfort is not

only passed on as a commodity but also achieved by team interaction. By discussing certain

discomforts, comfort can be achieved and passed on. Not only to the partner, but also to other

engagement teams, the client and finally the public.

Pentland (1993, p. 612) also mentions the importance of the person performing the

“ritual”. The audit (ritual) is only valid when performed by the auditors of the firm. This is

the case, because auditors are trusted to perform the right steps and the clients management

may act opportunistically and can even be motivated to deceive the auditor. This is amplified

by the strict separation of the auditor and the client during the audit process. This also results

in an enlarged feeling of, us against the rest.

Pentland (1993) thinks that using the word comfort can suggest that auditors trust on

their “gut feeling”. A reaction on a feeling without using ones rationale. Getting a bad

“feeling” about something results in discomfort and vice versa. According to Humphrey and

Moizer (1990) identifying the gut feel is an important factor during the planning of and audit

and the findings of Pentland (1993) even suggest that it is important throughout the entire

audit. As Pentland (1993, p. 619) states: “The essential point is that auditors need to achieve

an emotional state with respect to their work, not just a cognitive one.”

Pentland’s theory (1993) also describes the interaction between the auditor and the

client in the area of validation. Inventory taking for example, is done by the client with

observation of the auditor. Pentland (1993) describes this as ritual purification. Because an

auditor cannot review all systems and procedures, he has to rely on the client to explain how

the business works and he has to trust on his feeling and experience if he deems the

explanation reasonable.

The sacredness of the signature is another subject that Pentland discusses in his

research. He sees it as the key to understanding the audit ritual. Since comfort depends on

others finishing the ritual it is a vital part of “getting comfortable”. So when a partner signs it

can be seen as a symbol for the end of the audit were all auditors are comfortable.

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And as Pentland (1993) mentions in his conclusions,: “For any given rule, one must

decide when to apply it, which requires more rules, each of which requires more rules.” So

even though auditing is a profession with many rules and regulations, one must also trust on

emotions and their “gut feel”. Auditing is a way to create comfort, for the engagement team,

the audit firm and finally the public.

5.1.2. Comfort Theory and legitimacy

Where Pentland (1993) focused on the ritual of auditing and how it creates comfort, Power

(2003) looks at how legitimacy is created by auditing. Power describes legitimacy in his

paper when financial statements come across as trustworthy because of the audit done by the

auditors. Where comfort is more upon the auditors themselves, legitimacy is more about how

audits come across towards the public. And as Pentland (1993, p. 612) describes, an audit an

audit is only valid and perceived trustworthy when it performed by a certain individual.

Power (2003) looks at legitimacy around four themes: The audit process and formal

structure; auditing as business, working papers and image management; and new audits. With

the focus on legitimacy, he looks more at the societal view of auditing than the common

numerical based research.

When taking the audit process and its formal structure into account one subject

primarily arises: the structure-judgement debate. This examines to what extent the audit

process should be structured and if there should be formal guidelines (Power, 2003). Power

(2003) sees a trend towards more structure in auditing, but papers with a more societal view

argue that more structure and regulations do not improve the audit quality and legitimacy

(Herrbach, 2001; Pentland, 1993; Vanstraelen et al., 2012). Previous literature focused on the

financial background and compared audit quality from US GAAP firms, which have stricter

guidelines and rules, to non-US GAAP firms. They found that audit quality is higher at US

GAAP firms (Bradshaw and Miller, 2008; Holthausen, 2009; Lang et al., 2006). So whether

it is better to implement stricter regulation is not clear. If this increases comfort is also still

the question, and this could be a possibility for future research.

Auditing as business is the second theme Power (2003) describes in his paper. Power

discusses the cost-quality dilemma. Audit firms become more and more profitable businesses,

but it is not clear how this will affect audit quality. Humphrey and Moizer (1990) interviewed

practitioners about the audit planning process. They criticized the gap there is between what

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officially needs to happen in the audit process and what happens in practice. Audits are meant

to assure financial statements and give comfort to the public, but there is the danger that the

focus is shifting towards making profit instead of the quality of the audit. This could lead to a

decrease in independence, what will lead to a decrease in audit quality (Deangelo, 1981).

Power (2003) continues with image management and working papers where he clasps

back to Pentland’s research (1993). First, Power mentioned how important the image of

auditors is. He uses an example from Pentland’s paper (1993). “working long hours with

short breaks may be needed to get the work done in some technical sense, but this also has an

important social function. The impression of audit is much less of a practice comprised by

careful and considered judgement, as by relentless application and effort. In place of, or at

least in addition to, cool cognition, we see elaborate displays of hard work”(Power, 2003,

pp.385-386). Power (2003) agrees with Pentland on the notion that auditing is a “certification

of the unknowable” (Pentland, 1993, p. 611). To create trust among the public the image of

an auditor is almost just as important as what he really does.

Where different dimensions of an audit emerge is in the production of working papers

(Power, 2003). Van Maanen and Pentland (1994) did research on the role of documentation

in representing practice. Working papers give a script of what has been done in the audit and

can give the public increased trust. But because of the importance of working papers this can

also lead to a too big focus on creating working papers and a decrease in focus in doing the

audit (Francis, 1994). But all of this does confirm Pentland’s notion of the importance micro-

interactions in auditing and their consequences for macro-constructions.

The last theme Power (2003) discusses in his paper is new audits. Till what level do

people want to extent auditing into new areas? By auditing something, it gives people more

comfort but the question is whether everything auditable? Power (2003) sees more and more

new spaces being audited and where this is not possible it still gives an important foothold.

Nowadays you have several types of auditing in new spaces as Power predicted, particularly

in the areas of efficiency auditing and corporate sustainability reporting. Claims are made that

the well-developed global standard and professional ‘independence and ethical requirements’,

made public accountants as ‘higher quality’ assurance providers (DeAngelo, 1981; Simnett et

al., 2009; Watts and Zimmerman, 1986).

Power (2003) is of the opinion that, while auditing seems to be a very technical and

thought-out process, it often is not. Pentland (1993) and Power (2003) agree on this subject,

which implicates that the comfort level of an auditor is more important than it might seem. If

auditors will not follow outset blueprints but rather follow their own instinct, establishing

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their comfort levels and when they are achieved is very important. But it is important that the

symbol of comfort is created by a credible and independent authority to create any value

(Power, 1999).

5.1.3. Comfort framework

Carrington and Catásus (2007) continue with the research on the comfort theory. Carrington

and Catásus (2007) develop a ‘comfort framework’ based on the work of Kolcaba and

Kolcaba (1991). Kolcaba and Kolcaba (1991) developed the original comfort theory for the

nursing industry. In their research comfort was taken more literal and used to describe the

state of comfort of a patient. Pentland (1993) transformed the theory to make it useable for

describing the audit ritual. Carrington and Catásus (2007) combined both and made a

framework consisting of three types of comfort, namely: The state sense, the relief sense and

the renewal sense.

With the state sense, all possible outcomes of comfort are described. It does not

directly mean there is an absence of discomfort, but it is rather determined by the conditions

that build comfort. The state sense suggest that at any given time there is comfort and

discomfort and the state sense is record of all comfort and discomfort. In auditing, this relates

to the situation when enough effort has been invested to come to an opinion. So when the

audit has created a large enough sense of comfort to produce a clean sheet. Therefore this

sense aligns with the view in auditing that 100% assurance of the audit is impossible.

The relief sense refers to the acts that relieve discomfort. By decreasing discomfort,

an non-acceptable level of comfort can be turned into an acceptable level of comfort. Relief

aims in this sense, to eliminating discomfort. In the audit practice this leads to “teasing out

the acts that are obligatory to perform” (Carrington and Catásus, 2007).

And last, the renewal sense of comfort indicates the revitalization on how comfort is

perceived. It is about new views on both the state and relief sense. In auditing this can be

seen as creating new definitions of what is acceptable during an audit. It is possible that an

auditor is comfortable with something at first but this changes over time. It can also been

seen as an example of a pro argument for auditor rotation ( Myers et al., 2003). This is

because the tenure and audit quality relation suggest that the longer an auditor has audited a

specific client, the less likely he is to sign a qualified audit report.

Carrington and Catásus (2007) offer a good analogy to describe the differences

between senses of comfort. “A high jumper may help illustrate comfort theory as applied

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here. The height of the bar is where the state of comfort is set in every particular audit (or

even account). The auditor has to succeed in attaining this height to attain a comfortable

state. Comfort as relief concerns what it takes the auditor to reach this height and how s/he

goes about doing it. For the high jumper this may imply a certain type of shoes and

a specific distance for the run-up. The changes in the level of comfort can be understood as

changes in the height of the bar. This situation corresponds to the notion of comfort as

renewal.”

Carrington and Catásus (2007) used their framework to give a fresh view on the

comfort theory. “we have made an effort to qualify our understanding of the actors who

influence the level of comfort, how comfort is attained and how the comfort level differs”

(Carrington and Catásus, 2007, p. 39). Even though the comfort theory, as used by Carrington

and Catásus (2007), is created by Pentland (1993), Carrington and Catásus (2007) found that

the auditors do not view auditing as a ritual and see the comfort theory as something else.

The comfort theory is according to Carrington and Catásus (2007) something more

than used rituals. The perspective of their subjects is that the comfort production is much

more than signing the report. The role is according to Carrington and Catásus (2007) much

smaller than described by Pentland (1993). Many actors are involved and an audit is not

finished until all relevant actors are convinced.

5.2. Client types

5.2.1. What are client types?

When speaking about client types in the business of auditing, multiple types can be meant.

First of all, the size of a client is a type, the size does exert influence on the audit and its

quality (Reynolds & Francis, 2000; Francis, 2004; Knechel et al., 2012). Also, there is a

difference in risk between clients and the pressure a client applies to the auditor (Blay, 2005).

The tenure of the auditor also plays a role in auditing and there are contracting results when it

comes to this subject (Deangelo, 1989; Gosh & Moon, 2005).

As can be seen there has been a lot of research on client types and their influence on

audit quality. But almost none of these are qualitative studies. This thesis divides clients in

different industries and therefore answers to the need for more qualitative research in the field

of clients and their influence on auditing.

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5.2.2. Client size and their influence on the audit process

A lot of research (Chung and Kallapur, 2003; Deangelo, 1981; Reynolds and Francis, 2000)

has been done on the influence of client size on the audit process. But whether there is a

positive or negative influence on the audit quality is not clear. As Chung and Kallapur (2003,

p. 937) mention, there are positive and negative consequences on auditor independence of

having a large sized client. On the one hand, larger firms are more important to the auditor,

which may lead to more pressure from that client on the auditor to deliver a positive outcome

on their audit. But on the other hand, larger clients also have an increased litigation risk

which encourages auditors to be more conservative (Reynolds & Francis, 2000). Reynolds

and Francis (2000) and Chung and Kallapur (2003) could not find significant evidence that

client size influences the independence of the auditor, while Reynolds and Francis (2000) do

find significant evidence that auditors act more conservative. This suggests that reputation

protection dominates auditor behavior.

Besides the pressure a larger client could exert, larger clients are also more complex

and harder to fathom. This can lead to a lower quality audit because it is harder to be aware of

everything in the company (Carcello & Nagy, 2004). However, with bigger clients an audit

firm has more budget and can make more use of industry specialized auditors (Balsam et al.,

2003).

A smaller client has overall a lower quality of financial statements and more work

needs to be done to change the financial statement so that an unqualified opinion can be

handed out (Stein et al., 1994). McKeown (1991) found that larger clients are less likely to

receive a going‐concern opinion, even after controlling for the effect of client size on the

probability of business failure.

The overall opinion is that client size has some influence on the auditor. Whether this

is positive or negative is hard to say. It is also hard to determine, by using previous literature,

whether client size has an impact on comfort creation. More pressure should lead to a harder

to reach comfort level as being conservative would. But using industry specialized auditors

should bring some relief and should increase comfort levels (Balsam et al., 2003).

5.2.3. Client risk

In this thesis, client risk is seen as the risk whether accepting the client will lead to the audit

firm suffer a loss on the engagement through a lack of engagement profitability or future

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litigation (Johnstone, 2000). This client risk is determined by client-related risk related to

internal control and financial viability (Johnstone, 2000). The risk is based on client

characteristics as: financial condition, levels of accounts receivable and inventory, sales

growth, market value of equity, and variability in the client's stock returns (Pratt and Stice,

1994). By examining client characteristics, a judgement about the client risk can be made by

the auditor. This often consists of two types, “risky and safe”. This judgement leads to the

valuation of the audit fee (Pratt and Stice, 1994). In the “post-enron era” and in times of

increased regulation risk, tolerance of auditors has decreased (Landsman et al., 2009).

Landsman et al. (2009) also found a shift in client acceptance, towards a preference of less

“risky” clients.

5.2.4. Tenure

The tenure of the relationship between client and auditor is something that also exerts

influence. Independence can decrease because of a relationship between the client and

auditor, which leads to lower audit quality and even earnings management in some cases

(Myers and Myers, 2003).

Ghosh and Moon (2005) found that investors and information intermediaries are of

the opinion that audit quality increase with tenure. They found that investors perceive

earnings quality as improving with auditor tenure, this is because by analyzing the earnings

response coefficients from returns-earnings regressions increases with auditor tenure. They

also concluded that financial analysts perceive earnings quality improved when there was a

longer auditor tenure.

Knowledge is something that is also of great importance for an audit, especially

knowledge of the client’s accounting system and internal control structure (Johnson et al.,

2002). This knowledge is client specific. Although auditors use different types of knowledge

(such as general knowledge and industry knowledge) to produce an audit, client-specific

knowledge is needed to conduct an audit (Knapp, 1991). So auditing a new client, this can

result in significant start-up costs (DeAngelo, 1981). Less client-specific knowledge in the

beginning of an engagement may occur in a lower likelihood of detecting material

misstatements, which lead to giving auditors a comparative advantage in detecting errors over

time as they obtain a deeper understanding of the client’s business (Beck et al., 1988).

But even though there are positive points to auditor tenure, there is mandatory auditor

rotation. Myers et al. (2003) for example did not find a significant relation between auditor

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rotation and the need for identifying restatements and thus found no support for auditor

rotation. Camaran et al. (2014) found even adverse consequences of mandatory rotation. This

is because implementing this regulation and executing it is very costly. And there are almost

no improvements in the quality of the audit.

5.2.5. Industry type

The industry type of a client also has impact on the audit (Cooke, 1992). In some industries,

delivering a faulty financial statement, could have a bigger impact than in other sector. An

example is the financial service industry, which includes banks and insurance companies.

This industry also asks for more industry specialized auditors than a “simple” production

company for example (Balsam et al., 2003).

Stein et al. (1994) also found that the measurement of risk and its impact on audit

production varies across industries. In the financial industry, for example, the fact that a

client is publicly held is not important for the audit while the audit production is affected

when the financial client report a net loss.

Every type of industry has its own specific processes and controls. The risks of an

industry differ and should be accounted for (PwC guidelines). An auditor specializes over

time in a certain industry by retrieving industry specific knowledge and receiving training on

a specific industry (Solomon et al., 1999). The fact that there are industry specialized auditors

only confirms that there are differences between the industry. But how this specifically

impacts the auditor and namely its comfort level is something that is not clear and hopefully

can be answered at the end of this thesis.

Overall, clients differ in many ways, size, client risk, tenure of auditing a client and

the industry of the client. It is obvious that these characteristics have an impact on the audit

but the way this impacts the auditors comfort level is not clear yet.

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6. Methodology

In this chapter the methodology of this thesis will be described. First, the importance of

qualitative research will be outlined and why this type of research complements the

answering of the research question. This will be followed with how the data of this

researched will be collected. The chapter then will continue with describing the case study

that will be used and the chapter ends with the analysis of the case.

6.1. Importance of qualitative research

Case studies can produce much more detailed information about a few people and cases than

a large-sample study can (Patton, 1990). And qualitative research can offer new insights and

leads to new paths in research that quantitative research cannot. Quantitative research is

based on an artificial setting and its main purpose is to generalize findings, whereas

qualitative research is set in a natural environment and aimed at contextual understanding

(Yin, 2009)

In this case, qualitative research is the right fit because there is limited information

about the comfort theory in relationship with client types. Qualitative data research can offer

more in this case than quantitative research could (Carrington and Catásus, 2007). And even

though there is some resistance towards qualitative research, the pro’s still outweigh the con’s

( Denzin and Lincon, 2009).

This case study wants to address the following research question: “In what way do

client types influence the comfort levels of an auditor?” The question was formulated this

way to leave all answer possibilities open. So first of all, do client types impact the comfort

levels at all and if so, in what way. Yin (2009, p. 2) mentions that a good case study ensures

that the investigator has little control over events and the focus of the research is on a

contemporary phenomenon within a real-life context. The researcher has no control on the

outcome of the research and the study focuses on a contemporary phenomenon within a real-

life context. So the case study research method is in line with the purpose of the study.

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6.2. Data collection

“Qualitative research methods involve the systematic collection, organization, and

interpretation of textual material derived from talk or observation. It is used in the

exploration of meanings of social phenomena as experienced by individuals themselves, in

their natural context.” (Malterud, 2001, p. 483)

The research question was analyzed through semi-structured interviews, documentary

analysis and participant observation. The use of multiple sources of evidence also ensures the

construct validity of the research.

The research of Carrington and Catásus (2007) explicitly asks for further research on

the impact of client types on the comfort production of auditors. That is why information

from their research is questioned in this researched and this dissertation will use the same

characteristics of the interviewees as Carrington and Catásus (2007) did. Using the same

characteristics will increase this research’s reliability. Reliability is namely an important

factor of conducting research, reliability is necessary so that if the research would be

replicated by subsequent researchers along the same steps again that the same results will

show (Gibbert et al., 2008). This is needed to keep errors and biases in the research to a

minimum (Yin, 2009). Yin (2009) describes two approaches to enhance the reliability, the

first is a case study protocol and the second is a case study database. A case study protocol

entails a the documentation of how the entire case study has been conducted (Gibbert et al.,

2008). Therefore, in this research all relevant issues of how the case study is conducted will

be specified. A case study database is put together that includes important case study

documents and the narratives collected such as the recordings of interviews and interview

transcripts.

The interviews were conducted in a semi-structured manner instead of a structured

manner because this allows the interviews to be more flexible and allows the interviewee to

help address the issues he wants to address. Considering that everybody encounters

experiences differently and by keeping the interview not too rigid, there is an opportunity to

play into people’s differences. For a structured interview it is needed to see the interviewee as

a subject and that there is no relationship between both the interviewer and the interviewee

(King, 1994). This is not the case in this research and it is also believed that it is not possible

to stay completely objective in interviews (King, 1994). Because of the familiarity of the

researcher with the company, the interview was tailored somewhat to fit the company

specifics. For example: using the client differentiation that PwC uses.

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6.3. Case design

The research has taken place at the big four audit firm; PwC in the Amsterdam office in the

Netherlands. Access was granted by a thesis internship, this internship is developed to write

your thesis at their office. This made it possible to not only interview auditors at the company

but also provided the opportunity to observe auditors and their interaction with the client.

This was achieved by following auditors for a week at one of PwC’s clients. During this

week, communication among auditors could be observed, mainly their use of language can be

of interest for this study.

The reason the research is conducted at a big 4 audit firm is that many researchers are

of opinion that big 4 audit firms deliver the best quality audits ( Krishnan, 2003; Francis,

2004; Francis and Yu, 2009). Attaining a state of comfort can be seen as a creating the

highest quality audit. A substantial part of former research (Carrington & Catásus, 2007;

Pentland, 1993; Van Maanen and Pentland, 1994) done on the subject of the comfort theory

is done with big 4 auditors. The reason that the research has taken place at only one of the big

4 firms is to filter out inconsistencies. All the firms work with different frameworks and

different types of titles. By interviewing people only at PwC this all is the same while they do

visit different clients. So the effect the client has on comfort levels is maximized.

In the search for the production of comfort, we targeted non-signing auditors,

that is, the auditors beneath the top in the chain of command of the audit team

(Messier, 2003). The auditors recruited for participating in the interviews have 2 to 8 years’

experience. These auditors are in the midst of the audit team and keep track of the comfort

levels and how to create more comfort (Carrington and Catásus, 2007). Also Carrington and

Catásus (2007) used senior auditors in their research. This way the result of their research

can be applied to this research.

Nine auditors were interviewed, of which one is associate, one is assistant manager,

one is manager and six are senior associates. The associate has the least experience with two

years and the manager has the most experience with 8 years. The author has worked with four

out of the nine interviewees. There were nine interviews conducted in total and that resulted

in three interviews per industry. Table 1 shows an overview of the interviewee records.

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Table 1. Interviewee selection

Interviewee Function Years’ experience Industry Duration

I1 Associate 2 years FS 00:39:35

I2 Senior Associate 3 years CIPS/TICE 00:42:24

I3 Senior Associate 6 years FS 00:40:33

I4 Senior Associate 6 years PC/PS 00:36:12

I5 Assistant Manager 8 years PC/PS 00:38:34

I6 Senior Associate 6 years FS 00:31:22

I7 Senior Associate 3 years CIPS/TICE 00:37:31

I8 Manager 8 years PC/PS 00:40:51

I9 Senior Associate 4 years CIPS/TICE 00:43:25

The interviews were conducted after the busy season1 during May 2015. This ensured

the auditors still had their clients fresh in mind but were more relaxed than during the busy

season. Furthermore, all the interviewees were available during this period and could almost

all be interviewed at the PwC office in Amsterdam. The face-to-face interviews were held in

private rooms which ensured that the interviewees could answer freely. This also warranted

minimal background noise and distraction. The interviews were held approximately two days

apart so the interviews could be transcribed but when starting a new interview the other

would still be fresh in the interviewers mind.

Before planning dates for the interviews all people were emailed in advance to ensure

they could be interviewed. This email contained a short introduction in the research of this

thesis and what the interview will entail, including how long the interview will last

approximately and where the interviews would be held. By sending this email, the researcher

could warrant that the interviewees would be available and if not had time enough to replace

this person.

The average duration of the interviews is around the 40 minutes, with outliers of 31

minutes and 43 minutes. Nine interviews were conducted and all of them in Dutch. The

interviews were all conducted in Dutch because of the nature of the investigation, namely

comfort levels, which focus on the emotional state of the auditor. All the auditors do their

1 Term used at PwC to describe the busiest season of the year. The period is from December till May where the fiscal years of most companies have ended.

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day-to-day work in Dutch and Dutch is their first language. So to maximize results, the

research chose to do the interviews in Dutch.

The interviews’ main focus lied on the impact of client types on the comfort levels of

auditors. The types that were differentiated between were the size of a client’s firm, the

industry of the audited firms and the tenure at which an auditor has been auditing the client.

In this case we speak about a “big” client when it has mandatory audits and has somewhat

complex processes. The audit will take several weeks or even months. A “small” client will

be in this context a client that often has voluntary audits, is rather simple and the audit can be

done within a week or two. Of course there a lot of companies that are not containable within

either of these identities but they will not play a role in this research. The industry that were

differentiated between were financial clients, public sector clients and the consumer goods

and production clients.

Of all the interviews, two were conducted by conference call and the others were

conducted face to face. During the interviews an interview guide was used which can be

viewed in appendix 1. To ensure validity of the research respondent validation was acquired

from all the interviewees. The transcripts of the interviews were emailed to the interviewee so

they could give their permission to use the data from the interviews and also to give them the

opportunity to make additional comments when necessary.

Any additional comments of the interviewees were included before analysis was

continued. Additionally, all personal information of the interviewees and their clients were

anonymized. This to ensure all interviewees would answer to all honesty and without any

consequences.

Besides using interviews as data for this research, the researcher also made

observations during several working days at the clients office and working at the Amsterdam

PwC office. This notes were made during the audit and used the contextualize the outcome of

this research. But because narrative data is fairly uncommon to be used in quantitative

auditing research this will be used to assess the validity of the interviews, are the answers the

subjects gave aligning with what the researcher saw? And to provide side notes, were

clarification is needed.

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6.4. Case analysis

After each interview was finished, the researcher made additional notes on the interview.

These consisted out of the impressions the interviewee made on the researcher, e.g. gestures,

pauses and facial expressions. Also notes were made if anything of meaning was said before

or after the interview. After finishing an interview, it was transcribed immediately to ensure

the atmosphere of the interview could still be recorded.

The transcribing of the interviews led to 58 pages of interview data. This data was

coded in Atlas.ti, while using a predetermined coding scheme, as can be seen in table 2. The

first code has to do with the characteristics of the interviewee. This code allows the dividing

of the interviewees per experience level and industry type.

The following codes were based on the comfort framework as described by

Carrington and Catásus (2007). The first category is interviewee, where the characteristics of

the interviewees are described by either experience of industry. This is followed by the

themes from the Carrington and Catásus (2007) framework. The first is relief sense of

comfort where a financial audit is described and how important cooperation of the client is.

This is followed by the state sense of comfort were is determined when there is enough

assurance acquired by the auditor and how the materiality level is chosen. The last

component of the framework is the renewal sense. Hereby the influence of the experience of

the auditor with the field and client is examined. Each article had its own cluster of codes

(Saldana, 2012) to ensure clarity of all the codes. The last code category is the client

category. Here client differences are incorporated. The outcomes of all the categories can be

cross referenced.

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Table 2. coding scheme

Category Sub-Category Content

Interviewee Experience The experience of the auditor

Industry The main industry the auditor works in

Relief sense Auditing What do you do during an audit?

Cooperation client Does the client cooperate with the auditor

State Sense Assurance When is enough assurance acquired

Materiality how is materiality determined?

Renewal sense Tenure How much experience does the auditor have?

And how does that impact his audit

Client Size Small vs. Large firms

Industry The type of industry of the client

Tenure How long is the auditor auditing the client?

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7. PwC : the case context

PwC is the second largest professional services network in the world and the organization

was formed in 1998 by a merger between Coopers & Lybrand and Price Waterhouse and

experienced a name change to PwC in 2010. Its main service is assurance which contains 45

% of its total operations. In this thesis the focus will be on the audit component of the

assurance services at the Amsterdam offices (PwC internal portal, 2015).

The Amsterdam offices of PwC offers employment to over 2,000 people and consist

of two buildings, Westgate I and II. All of the assurance practices are done in Westgate I

where every industry has its own floor. The financial services branch is only accessible with

an exclusive pass only provided to the employees of the F.S (PwC Guidelines, 2015). All

other auditing departments are accessible to all auditors to make discussions and

brainstorming as easy as possible.

Everybody starting at PwC begins with the associate academy, a traineeship

consisting out of two years were beginning auditors can experience all audit types and

industries. After these two years one becomes senior associate until he obtains his R.A., then

the auditor moves on to assistant manager and then some will move on to manager, director

and partner. The reviewing of other employee’s work already starts at the senior associate

level but on the other hand, everybody has a coach until director level (PwC internal portal,

2015). So the people interviewed both have a supervisor and are a supervisor as reviewing

and being reviewed.

The PwC auditors do spend most of their time at the client. This way the client can be

asked about inconsistencies at all time. This also ensures that the auditor can experience non-

financial matters as internal control mechanisms but also the companies ambiance. Only

when the client is not available or certain tasks that only can be done at the office, the

auditors will be at the office, this comes down to about once a week (PwC guidelines, 2015).

7.1. PwC and its client types

PwC divides their clients by means of industry types. There are five categories of clients:

TICE, Financial service, Public sector, EU&M and private companies. TICE is an

abbreviation for technology, entertainment and media and telecommunications. The TICE

industry is an extremely dynamic industry with companies that are presented with daunting

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challenges to business models, supply chains, marketing operations, infrastructure, service

delivery and customer experience due to the impact of the ongoing digitization.

Financial services, often named F.S., consists out of five segments itself, namely:

Banking, Insurance, Pensions, Asset Management, Real Estate. This industry type often asks

for a more specialized audit. It is an industry that has extra risks because of the large public

interest in this sector.

The Public Sector audits companies in the public sector, hospitals and schools for

example. It can be very complex because the public sector differs a lot from the commercial

sector. Not only in information but also in way of working. Also the internal auditors are

often people with less financial experience as F.S internal auditors for example.

Energies, utilities and mining, or abbreviated EU&M, is also a very specific industry.

It is an industry that changes quickly and is not always the most stable industry (Bradford,

2006).

The last industry type is private companies, or P.C.. These companies have voluntary

audits and are not listed. These companies can have multiple reasons to want to be audited,

for example the owner/manager asks for an audit because the bank wants to review the

company or the owner/manager can use an audit as an extra control measure.

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8. Findings

As Eisenhart (1989, p. 763) states: “Analyzing data is the heart of building theory from case

studies, but it is both the most difficult and the least codified part of the process”. So to

enhance the findings in quality and clarity the findings are organized by using the framework

as described by Carrington and Catásus (2007).

The first subchapter will be comfort as relief, where the process of creating comfort

and the cooperation of the client will be discussed. This is followed by the state sense of

comfort, when is enough assurance acquired? This will be the primary question to be

answered. Also the difference between materiality levels per client will be presented. And the

final subchapter will be the renewal sense of comfort. Here the role of experience with the

client will be discussed and how this can influence the audit. All of the elements of the

Carrington and Catásus (2007) framework will mention how client-, size tenure and industry

play a role. To make the above information more clear all of it is summarized in the

following table.

Table 3: framework

Comfort type Components Client types

State sense Materiality

determination

1. Size

2. Industry

When is maximal

assurance achieved

Relief sense Cooperation of

client

1. Size

2. Industry

Renewal sense Experience with the

same client

1. Size

2. Industry

8.1. State sense

The state sense suggest that at any given time there is comfort and discomfort and the state

sense is record of all comfort and discomfort. (Carrington and Catásus, 2007). In auditing,

this relates to the situation when enough effort has been invested to come to an opinion. So

when does an auditor feel comfortable enough to give out an opinion?

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An audit itself consist out of a kick-off meeting, the checking of posts, the reviewing

of this checking and a final meeting where the opinion is determined and all the findings are

discussed with the client (de Zoete, observation, 14-04-2015). An audit is done when:

“we have acquired enough reliable information to give an opinion on the financial

statements” (I2, S.A.)

“We link the qualitative with the quantitative, so linking the processes to the numbers

in the financial statements, so when that is all clear and done you sign off and make

sure all mistakes are out of the financial statement for the users of that financial

statement.” (I7, S.A).

But when the researcher asked more in depth about when do you have enough reliable

information, it was apparently harder for the interviewees to answer.

“it stays hard to determine, but at a certain point we can say, the risk that there still

is a material mistake in the financial statements is almost zero. So then we have done

enough to get that 95 % assurance. But after all, it is a feeling, a consideration you

have to make also about the conversations you had with the client. But then you get to

a point and you can say, now it is good, but of course it is a grey area.” (I3, S.A.)

“you are finished when you and the client are comfortable with the results.”(I5,

Assistant Manager)

So, it is not only important for an auditor that all information that needs to be acquired is

acquired but also to obtain a sense of comfort. And also that not only the auditor feels

comfortable but also that this comfort can be passed on to the client.

Messier (2003) States that the amount of work put into an audit should correspond to

the risk level of the client. This means that every audit differs in work needed and this is

confirmed by the auditors.

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“Every client is different and has its own specifics. A bank for example has a lower

threshold for risks but that is also mandated by AURA2. And there are also difference

between PC and PS clients compared to larger firms. This leads among other things

to different materiality levels.”(I4, S.A)

As mentioned by the interviewee all clients have different materiality levels. Materiality is

determined by the team during the kick-off meeting and certain criteria play a role during this

determination. Examples are; How has the client performed in the past, are there certain

specific risks and how is the quality of the internal controls? This leads to a materiality level

whereby the team feels comfortable that they will find all material mistakes in the financial

statement.

“When starting with an audit you look at the inherent risk. What are the risks and

what does management do to minimize these risks? So as auditor you judge the

internal controls at the client. And after judging these controls you have to stand still

and determine what they mean for you as an auditor. What do we have to do to

acquire enough information? And this steps are mentioned in the PwC audit guide

and this is based upon the ISA guidelines. (I4, S.A.)

“At PwC we use 3 types of materiality that we determine at the beginning of the audit.

The 3 levels are: overall materiality, the highest level, performance materiality and

sum materiality, obviously insignificant. We almost never discuss anything under sum

because it is statistically determined that anything beneath that line will not lead to a

material mistake in the financial statement and will affect our opinion. Things that

are of performance materiality do not have to be changed by the client but we advise

them to do so. And if they don’t we will make a note of it and take it with us in

determining next year’s materiality. (I1, associate).

Even though determining the materiality is a carefully thought out process there are still

instances whereby an auditor looks at a post under materiality. The main reason the

interviewees gave was to increase understandability and as mentioned before,

2 See abbreviation and definition page, p. 3

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understandability is key for a good quality audit. One of the interviewees gave the following

example for looking at posts under materiality:

“an example for looking at a post under materiality is at real-estate clients you will

look at the valuation of real-estate but also at some provided services. And I always

want to look at what exact service is delivered? Services are a superficial term and if

you do not comprehend it fully you do not get a feeling of what is playing at the firm.

That is not something that you have to do because of regulation but it comes forth out

of my on critical perspective, that I understand what is happening.” (I6, S.A.)

“ normally you follow Aura when performing your tasks but sometimes you want to

look into something a bit deeper and this is a feelings issue. When your speaking with

the client or you see something and it’s not clear, you want to figure out how and

what it is. Of course it still is a consideration if you look at it because it is probably

not material. It is something that is more of a personal interest then something

mandatory.”(I5, Assistant Manager).

This confirms the importance of the comfort theory because the feeling of an auditor after an

audit is important for him. An auditor does not just want to follow the rules and come to an

opinion but want to achieve a feeling of comfort too. But this makes it harder to determine

when enough assurance has acquired. As the interviewees state: “it is a feeling”.

8.1.1. Size

The first type differentiated in this paper is if the size of client impacts the state comfort level

of an auditor. As mentioned before, materiality is determined ahead of time by the quality of

internal controls. In large companies internal controls are more extended, which makes it

harder to make a judgment of the quality. The internal controls are more complex and harder

to keep up to code.

“During the interim control we can form a picture of the company’s internal controls

which can help us determining the materiality. Larger companies are more complex

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and this can lead to a lower materiality because their controls are not sufficient for

their company size.” (I3, S.A.)

But on the other hand, smaller companies often have 1 or 2 members in their accounting

team, this can make fraud easier for example. Also by speaking to more people about their

decisions and how the company works a better picture can be formed on the company.

“At the bigger client you speak to more people because everything at the firm is

bigger. While at smaller companies you often speak to 1 controller and that is it. This

sometimes give you an insufficient picture of the clients’ whole company.” (I7, S.A.)

Concluding, size does impact the state comfort of the auditors. To achieve enough

assurance and comfort materiality has to be determined. This is done on basis of internal

controls and other information. And while a smaller company is easier to fathom, they also

have smaller accounting departments what could increase fraud and decrease the overall

picture of the company.

8.1.2. Industry

As mentioned before, the industry types that this thesis focusses on are financial clients,

public sector clients and the consumer goods and production clients. When creating comfort

as a state, especially the F.S industry differentiated compared to the other industries. First of

all this can be found in the PwC guide as mentioned by interviewee 4. The PwC guideline

mandates lower risk thresholds at F.S clients.

“The F.S sector is very specific, it has more rules and regulations and the subject is

not as tangible as a production company for example. This can be harder to fully

comprehend especially when starting out as an auditor.” (I6, S.A.)

Because the F.S sector can be harder to understand it can acquire some extra work and

information to create the same amount of comfort as in the other sectors. This can also differ

between auditors, as Carrington and Catásus (2007) mention: “what may be comfortable for

one person may not be for another.” But the experience and expertise of other auditors can

take these insecurities away and increase comfort.

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“ You can learn a lot from your team and specialist when auditing with them,

everybody has their strengths and weaknesses but you can learn a lot from each

other”. (I6, S.A.)

And as Pentland (1993) mentions in his work, it is a team effort. “A cohesive, tightly

knit audit team is essential to the creation of a coherent set of working papers and a

successful engagement.”(Pentland, 1993, 614).

8.2. Relief sense

“The concept of comfort as relief is about the acts that enable attaining a state of

comfort” (Carrington and Catásus, 2007). In the previous subchapter is was discussed when

enough assurance and comfort is created. In this subchapter the main question is: How to

achieve this comfort?

As mentioned before, acquiring enough information to come to an opinion is the key.

During an audit the financial statement and related information is provided by the client (de

Zoete, observation, 14-04-2015). So auditors are highly dependent on the input and

involvement of the client. They are involved during the whole process:

“the client is in a big way involved during the whole process. The client understands

the business and knows what is going on. He should provide me with information and

that is why it is important to have a good relationship with your client. They should

know what we expect from them and what they can expect from us.”(I6, S.A.)

To achieve comfort the client must cooperate to great extent with the auditor. Not

only does the audit depend on the information given by the client but the client also needs to

use this information to adjust the necessary in the financial statements.

“a client cooperation is important for an audit because in the end you need enough

information to grant an opinion. And when you get your information delivered

untimely or of low quality it will take you longer. Also this impacts the view of me on

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the client, when mistakes arise again and again, you are expecting the worse to come.

But when everything is organized and well substantiated, the risk that there is

something wore declines.”(I3, S.A.)

As indicated by interviewee 3 it is important for an auditor to receive timely and high

quality information of the client. This otherwise could increase the risk and this in turn will

lead to a decrease of comfort. As Pentland (1993) mentions, an auditor does not have the time

to do test every process and item himself so it is important that an auditor can rely on the

client to explain how the business works and what accounts are used for.

Also the way a client reacts to questions can determine the comfort levels of the

auditor. When a client reacts very hostile regarding questions this could indicate that

something is wrong and lead to a decrease in comfort.

“Alarms bells start ringing when a client acts very hostile. Why would he react in

such a way? When he reacts in such a way, I get a feeling that I need to do some extra

ground work to ensure that nothing is wrong and get comfortable with the audit. (I9,

S.A.)

8.2.1. Size

According to the interviewees, there is a big difference in the quality of information provided

by the clients and that there is a relation to the size of the firm.

“I have the feeling that smaller clients do not fully comprehend what we are doing

and that they are paying us to audit them. I think that leads to not giving us the right

documents on time. While at a big firm they understand the necessity of an audit and

that we are there for them and that they better work along. Also they have the

capacity to hire real financial people while smaller firms have not what also leads to

in a difference of the quality of delivered information.”(I7, S.A.)

“the quality of the information delivered is less at smaller clients.” (I9, S.A.)

On that account, smaller clients deliver lower quality information. Also, they deliver the

information less timely then the larger firms do. One could blame this on the fact that bigger

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firms have a bigger budget to higher financial professionals and have bigger internal audit

teams. Also the smaller clients do not completely understand the necessity of the audit and

therefor deliver lower quality information in a less timely manner. As one of the interviewees

states:

“Sometimes smaller clients see us as a company that comes in and correct their

mistakes, ‘do not worry about it, the auditor will come and correct our mistakes’

while larger clients just want us to confirm the quality of their performed work and

that all their finances are in order, so our real job. Therefor the quality sometimes is

lower at smaller firms.” (I6, S.A.)

Concluded can be that in the relief sense of comfort size of the client matters. The quality and

timeliness of the delivered information is lower at smaller clients. Therefore more measures

have to be taken to create comfort.

8.2.2. Industry

When taking comfort as relief into regard there are primarily differences between financial

clients and clients from the public sector. As mentioned before, it is probable that the

financial industry has more specialized personnel that handle their accounting. This leads to

provision of higher quality information.

Rules and regulations are also stricter in the F.S industry compared to the other

industries. So while the information is often timely acquired and of good quality and can be

hard to fully comprehend the information. The F.S industry audits also hire specialized

auditors because of this reason.

“The financial services sector is a specific sector with extra rules and regulation. This

can make it harder to fully comprehend what is going on.” (I6, S.A.)

“A production company is easier when it comes to acquiring the right information

and understanding it. Valuation of real estate for example is an art by itself and needs

more judgement than a cash post. So that is one of the reasons we use internal

specialist to be more certain and to get comfortable. (I3, S.A.)

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Acquiring comfort as relief differs per industry, especially in the F.S industry it asks

for a specialized eye. But on the other side the F.S industry does deliver high quality

information and understands what is asks from them. So comfort creation is different per

industry but the auditor should be comfortable at the end of every audit, only the journey

differs.

8.3. Renewal sense

The renewal sense of comfort focusses on how changes can impact comfort. The primary

question for this sub chapter therefore is : How does the relationship with client and audience

change and how does it impact the auditors comfort level?

The tenure of the relationship with the client is something that has been discussed

extensively in the last couple of years with the implementation of mandatory rotation

between audit firms. The auditors that were interviewed for this research all agreed that an

increase in tenure lead to an increase in comfort.

“When you visit a client a second time you are more comfortable. You know where

you are going and you the client. You have seen a portion of the posts and understand

specifics of that client. The audit will take up less time and energy.” (I7, S.A.)

By revisiting a client you can base your audit on the ones from the previous years. The

materiality have been tested and also in what way the client cooperates is known. During the

first year of an assignment everything is new and it takes a lot of time away from the audit

and into understanding the business.

A longer relationship between the auditor and the client leads to a better

understandings of what they can expect from each other. When an auditor is auditing a client

for a longer time he can raise the issues on the delivery of information for example.

“how longer you are auditing a client, how better the quality of the audit gets.

Because you increase your knowledge and experience of that particular client. Also

your insight in the clients risks increases, you also get to understand the industry

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better and better. I think the more time you are auditing a client, the better your audit

gets.”(I8, manager)

“You know where you are going, you know the client and have seen a large part of

the posts. You know the specifics, so auditing takes less time and energy.” (I7, S.A.)

By knowing the client more time can go into the auditing itself instead of the process of

understanding the business of the client. As Pentland (1993) mentions in his research,

auditing consist of acts providing complicated functional rituals in response to uncertainty. If

this uncertainty decreases by tenure, comfort will rise.

But tenure can also negatively impact the audit, it can decrease independence and

increase taken-for-grandness.

“I notice that how longer I am auditing a client, the faster I take something for

granted. So it is always great to get someone new on the team, to give a fresh perspective.

When you are auditing a client for a long time you say to yourself, this is how it goes. But a

new person can say; ‘hé, wait a minute, why do we not do it this way?’ and then you start to

see something that is far more efficient and you change your approach.”(I4, S.A.)

And while a decrease in independence and increased taken-for-grandness can lead to a lower

quality audit, it is not something that auditors are aware of and therefore leads to a lower

comfort. However when, as interviewee 4 states, a new person joins the team they can make

aware of their mistakes and change their ways. This can lead to an increase of comfort.

Tenure has its pros and cons, especially regarding the audit quality. But when it

comes to comfort it almost always increases comfort. The time spend on the job decreases

and the understanding between the client and the auditor increases. And while it also can

decrease independence and increase taken-for-grandness, this will not immediately lead to a

decrease of comfort. The arrival of a new team member on the other hand can lead to an

increase of comfort because the other auditors are made aware of their faults. By changing

their mistakes and making the audit process more efficient, the comfort levels of the auditors

increase.

Not only the tenure of the client can impact the comfort levels of the auditor. The

recent changes in regard to the crisis affected the comfort created through legitimacy. Banks

especially are in the public eye and the public have a very high expectancy regarding the

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quality of the financial statements. As Power (2003) states, the public trusts the legitimacy

created by the auditor. This has led in some cases to a “expectancy gap”.

There is something as an ‘expectancy gap’ between us and the public. The public uses

the financial statements with the idea that there are no mistakes anymore. But we only

have a little amount of time and only look at stuff above materiality. In some cases

materiality can go up to above a million. If somebody from the public notices a

difference of a million he will see that as a big mistake.”(I4, S.A.)

This ‘expectancy gap’ can be tedious for the auditors because one of the reasons they are

auditing is for the public.

“ as an auditor you have a trustworthy appearance towards the public. I have clients

that are regularly on the news and I do not want to find out that there are still

mistakes in the financial statements. Especially when a large group of people trust on

you for delivering a good financial statement.” (I3, S.A.)

“we do this for the user of the financial statements, so we are particularly cautious

that we do not send out the wrong idea.”(I1, associate).

Because of the trust the public has in these financial statements that are provided to

them, PwC has extra review boards that review the larger firms, whom financial statements

are used widely by the public. These review boards do give the auditors extra pressure.

“When we are auditing big important client the engagement leader does put extra

pressure on us. There is a bigger risk that we will fall in an extra review. If the review

board finds a mistakes this can have big consequences so you really want to be

comfortable with your work. This can lead to some more pressure from your partner

but also from yourself.”(I8, Manager)

The legitimacy an audit creates is an important factor for the auditors. They feel extra

pressure to provide a good quality audit which can lead to a higher threshold of comfort they

want to achieve.

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8.3.1. Size

Size plays an important role in the creation of comfort. Currently, the rules mandate rotation

only for partners at US GAAP companies (SOX, 2015) and per the first of January 2016 for

Dutch listed companies (NBA, 2015). This regulation thus only affects larger companies. As

mentioned, auditors prefer a client with longer tenure. Because of the familiarity with the

client this increases the comfort of the auditor at the start of the audit. Because the auditor

knows what to expect, the comfort is created more easily than an audit at a new client.

Also the pressure from the public and PwC is higher when a big and therefore

important client is audited. Which can lead to a decrease of comfort when auditing. But

again, an audit has to be done and get a ‘passing grade’ no matter the size of the client.

“An audit, is an audit. At the end there should not be any mistakes left in the financial

statements regardless of who the client is. But when I am feeling pressure because we

are auditing a large and important client I might take it to the extra level. But in the

other hand we often get more time for those clients so this probably also leads to a

more extended report.”(I8, Manager).

So while during an audit more pressure can lead to discomfort, at the end it can lead

to a higher level of comfort than at the end of an audit with less pressure. The auditor wants

to ensure that there are not any mistakes left and therefor set his own standards higher.

8.3.2. Industry

The private firms will not fall under the rotation regulation, so tenure will be higher at those

firms. The same conclusions about tenure as in the previous paragraph can be made. So the

PC industry will lead to higher comfort in that respect.

Because of the recent bank crisis the pressure in the F.S. industry is higher according

to the auditors.

“Since the crisis, the focus has increased on our work, you really do not want to make

any mistakes.” (I3, S.A.)

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The comfort is higher for the smaller firms because longer tenure will still be possible with

them. Also comfort is created more easily. And because of the recent higher pressure auditors

in the F.S industry feel this will lead to an initial lower comfort and in the end to higher

comfort. The risks are higher which lead to the initial lower comfort but because the pressure

leads to a higher standard regarding comfort, the comfort in the end will be higher.

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9. Discussion and Conclusion

While the comfort theory has been around for more than two decades there is still little

research on the subject. Pentland (1993) researched audit team behavior and described

auditing as an ritual. The audit ritual transforms the “ untrustworthy” state of financial

statements into a form that auditors, the client and the public are comfortable with (Pentland,

1993). This is more commonly known as the comfort theory. Power (2003) used this theory

in combination with legitimacy around four audit themes. Power (2003) found that “auditing

is far from being a self-evident set of techniques which require occasional improvement,

but is rather a series of hopes and aspirations inscribed in its most mundane routines.”

Carrington and Catásus (2007) have developed a comfort framework for researching

the comfort theory. This framework consists out of three types of comfort: State sense, relief

sense and renewal sense. Their ambition was to shed a light on the production of comfort

further than the ritualistic approach.

The choice for a qualitative case study led to the development of a comprehensive

discussion of the influence clients have on the comfort level of auditors. Furthermore, it

created the opportunity to research the different types of comfort in a different setting. The

empirical evidence needed for this discussion was provided by interviewing auditors that are

in the midst of their careers. These interviews provided the opportunity to discuss these types

in greater detail and depth compared to survey or data research. In addition, this paper offers

an additional view on the comfort theory in a more recent perspective. Last, the case study

created the opportunity to research whether the theoretical grounds upon which the comfort

theory is based, help explain the auditing practice. In doing so, this paper provides new in-

depth empirical evidence on the comfort theory.

This paper argues that the client plays are large role in the production of comfort. The

state sense of comfort is the first comfort type of the Carrington and Catásus (2007)

framework. The main issue with this comfort type is defining the point when enough comfort

and assurance is acquired. Materiality determination is one of the ways this point can be

determined. Materiality is determined during the start of an audit by the whole team. This is

determined by inter alia, the internal controls and the tenure of the client. The internal

controls are more comprehensive at larger companies, this leads to a higher risk. Higher risks

lead to a lower initial comfort and more information needs to be acquired to reach an

adequate level of comfort. The risks are also higher at the F.S. industry, so there the same

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case plays a role. Thus by acquiring the state sense of comfort client types play a role, both

the size and the industry.

The framework (Carrington and Catásus, 2007) continues with the relief sense of

comfort. The primary question that needs to be answered to acquire the relief sense of

comfort is: How to achieve comfort? When using the client perspective the most important

measure is the cooperation of the client. To achieve comfort, information needs to be

delivered by the client. The better the quality of this information and the better the timeliness,

the easier the production of comfort. When taking the interviews into account it was apparent

that larger firms have better quality information. The internal audit teams are often bigger and

better educated in accounting, this leads to better information compared to smaller firms. The

F.S. industry also delivers higher quality information. This because the internal audit team is

more well-known with finances than a P.S. industry for example. But the information

acquired at F.S. clients can be more difficult to fully comprehend by the cause of stricter and

different regulation than other industries. Thus, also in the relief sense of comfort the client

types play an important role in producing comfort.

The final type of comfort described in the framework of Carrington and Catásus

(2007) is the renewal sense of comfort. The central question that needed to be answered was

how the relationship with the client impacts the creation of comfort of the auditor and the

public? The interviewees all agreed that tenure increased their comfort levels. They knew the

risks and the client and the auditor know what to expect from each other. But they are also

aware that tenure can lead to a lower quality audit. The impact that tenure has on comfort

does not differ per client type, not in size or industry. Except for mandatory rotation, but

these only affect companies that use U.S. GAAP and listed companies per January 2016.

The recent crisis has also led to new renewal comfort levels. Financial professions are

more in the public eye as before and expectancy from the public has increased. This led to

more pressure for the auditor and to lower initial comfort. Bigger clients have more influence

on this pressure that leads to a decrease in comfort. They are more important for the firm and

it would have a bigger impact if PwC would lose those clients. The firms that fall into the

F.S. industry also form a bigger risk for the auditor. There is a bigger risk that they will fall

into an extra review and there is more pressure from the public. This also leads to a lower

initial comfort level.

In the introduction of this paper the question was asked in what way client types

influence the comfort levels of auditors. They do influence the comfort of auditors in a big

way and also different per client type. It cannot be said that bigger firms lead to more comfort

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or that F.S. client decrease initial comfort overall. But size and industry do affect the initial

comfort and the comfort production of the auditor. Pentland (1993) originally noticed that

client affect comfort but not in which way. Carrington and Catásus (2007) found that

cooperation of the client play an important role in the audit. Also that the comfort levels are

influenced by the risk of a client and the tenure of the relationship with the client, but whether

this differed per client type was not researched.

This study adds to the existing literature on the comfort theory. These thesis used

former research in combination with new acquire information about client types and how this

influenced comfort. By doing this research, it should have closed the research gap, as

identified in the paper of Carrington and Catásus (2007, p.53) somewhat. By providing more

information on the (under) researched subject of the comfort theory, it could trigger more

research. The thesis should also provide more information on the societal view of auditing in

general.

In light of my results there are still some limitations to keep in mind. An important

limitation of this research is the number of participants interviewed. A greater number of

participants would allow for studying between level differences and will improve analytical

generalization. This is in line with Chenail’s (2011, p. 255) article, that states:

“Instrumentation rigor and bias management are major challenges for qualitative

researchers employing interviewing as a data generation method in their studies.” Also all

the interviews were held in Dutch, this is because Dutch is the mother tongue of the

interviewees. It is important that the interviewees could answer directly without thinking how

they should say it. But this could mean that some of the meaning was lost in translation.

A suggestion for further research is to examine the relationship between recent

regulation changes and the comfort of auditors. This could be especially interesting when

mandatory rotation has be implemented in the Netherlands. This is because tenure plays a

large role in creating comfort for auditors. Another interesting way of using the comfort

theory is to look at cultural differences. Comfort is something that is not rational and

impacted by the auditors emotions. This is something that differs among cultures, especially

in a professional environment. As one of the interviewees also mentions:

“I notice a lot of differences between people from different ethnicities. In some

cultures hierarchy is very important and then it can be hard to have a lively discussion as a

solely Dutch team has.” (I5, assistant manager.)

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11. Appendix 1: Interview guide

Interviewer: Liselotte de Zoete

Interviewee:

Place of interview: PwC Amsterdam office

Duration of interview: …. minutes (from…….. to ………)

Introduction

I would like to first introduce myself and tell where this interview will be about. I am the

Liselotte de Zoete and I am a student accountancy & control at the University of Amsterdam.

I am now completing my master with my thesis and that is where this interview is for. The

questions I ask relate to my subject; the comfort theory and the influence client types have on

it. The comfort theory implies that accountants speak much more in terms of comfort than in

terms of risk etc. as you may know from laws and legislation. I research to what extent

customers affect your comfort level or stop exercising and that each customer is different. All

the answers you give me are completely anonymous. Just like your name and other data. If

you will allow me I will record this interview. To these recordings have only my supervisor

and I access. Gives you give me permission?

The interview will take between the 30 and 45 minutes. In case you do not feel comfortable

with answering a question or if you do not understand the question and you want me to

formulate a question differently, please let me know and I will do my best to comply with

your request. Before we start, do you have any questions?

The interviewee

What is your function and at which department do you work at PwC?

How look have you worked at PwC?

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The work

What is it what you exactly do at the client?

At which point do you have the idea you are done with the audit?

When do you and your team achieve the point an unqualified opinion can be given?

What factors contribute to increase your comfort on financial statements?

The client

What is the role of a client during an audit?

Does a client influence you during an audit? And if so, how?

Concluding

Are there any other issues that you would like to highlight which have not been discussed

during the interview? Thank you for your time and input