FEAR AND RISK IN THE AUDIT PROCESS
Henri Guénin-Paracini, CPA, CGA, Ph.D.
Université Laval
2325, rue de la Terrasse
Bureau 5234
Québec (Québec)
Canada G1V 0A6
Email:
Bertrand Malsch, MBA, Ph.D.
Queen’s School of Business
140, Union Street
Kingston (Ontario)
Canada K7L 3N6
E-mail:
Anne Marché Paillé, Ph.D.
Ghent University
Department of Psychoanalysis and Clinical Consulting
H. Dunantlaan 2
9000 Ghent
Belgium
Email:
Corresponding author: Henri Guénin-Paracini
January 2014
We are grateful to the practitioners who participated in this study. We benefited from the constant support and encouragements provided by Yves Gendron and Joni Young. We also feel deeply indebted to reviewers’ insightful comments. We thank participants at the IPA 2009 Emerging Scholars Colloquium for their challenging remarks.
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FEAR AND RISK IN THE AUDIT PROCESS
Abstract
Relying on an ethnographic study conducted in the French branch of a big audit firm and using a psychodynamic perspective to interpret the collected data, we show that auditors’ sense of comfort (Pentland, 1993) arises only at the end of the audit process, and that the rest of the time, public accountants are inhabited primarily by fear. Fear plays a crucial but ambivalent role in auditing. On one hand, auditors and audit firms cultivate this feeling through informal and formal techniques to stimulate vigilance, encourage self-surpassment, mitigate the anesthetizing effect of habit and maintain reputation. On the other hand, audit teams’ members strive to alleviate their fear in order to form and convey their conclusions with a certain degree of comfort. In the field, driven by fear, they manage to finally become comfortable either by mobilizing their ‘practical intelligence’ (an intelligence of the body which helps them handle that which, in their mission, cannot be obtained through the strict execution of standardized procedures) or by adopting defensive strategies (such as distancing themselves from work-related problems, mechanically applying audit methodologies or relaxing their conception of a job well done). Fear and risk are closely related phenomena. Michael Power (2007a, p. 180) notes that ‘the significant driver of the managerialization of risk management is an institutional fear and anxiety’. Yet the experience of fear and the role that fear plays in risk management processes is most often overlooked in the literature. In this respect, our study contributes to ‘emotionalize’ and challenge the cognitive and technical orientation adopted by most academics and regulators in their understanding of audit risks and auditors’ scepticism. We also discuss a number of avenues for future research with a view to encouraging further examination of the role that emotions play in the audit process.
Keywords: Auditors; Fear; Risk; Practical intelligence; Defensive strategies.
FEAR AND RISK IN THE AUDIT PROCESS
Introduction
Comfort [...] is what you feel at the end of an audit, when you’re just about certain that you’ve done your job properly. But you spend the rest of the time feeling anxious. [...]. As an auditor, if you have even a modicum of professional conscientiousness, you just can’t avoid caring about your job. In some ways, that’s what we’re paid to do. Our lives aren’t at risk, that’s true, but if I may draw on my taste in movies, I’d say auditing is to some extent the wages of fear.[1] (One senior interviewed during the study)
As argued by Maitlis and Ozcelik (2004, p. 375), ‘we now widely accept organizations as “emotional arenas” (Fineman, 1993, p. 9) and acknowledge the emotionally saturated nature of people’s work experience (Ashforth & Humphrey, 1995)’. Barsade and Gibson (2007, p. 36) note that ‘[i]n the last 30 years, an “affective revolution” has taken place, in which academics and managers alike have begun to appreciate how an organizational lens that integrates employee affect provides a perspective missing from earlier views’.
In the field of auditing, this ‘revolution’ has yet to occur. One of the most widespread accounting stereotypes still depicts the auditor as an actor who is almost entirely devoid of feeling (see e.g., Beard, 1994; Bougen, 1994; Dimnik & Felton, 2006). This image is reinforced by the ‘emotional labor’ (Hochschild, 1983) in which most auditors are asked to engage in order to project and maintain an aura of professionalism at work: ‘because accounting work is interpersonal, the adoption of an unemotional attitude is actually part of the work and of course “unemotional” is a misnomer for a particular emotional orientation, that of a professional-seeming coolness consistent with technocracy’ (Gill, 2009, p. 34). On the evidence of professional audit standards, audit work only appears to involve emotionless methods of algorithmic reasoning (Francis, 1994). And academic papers devoted to investigating the emotional dimension of public accounting remain extremely rare (McPhail, 2004; Nelson & Tan, 2005), with the exception of those examining the causes and/or consequences of auditors’ (role) stress (Smith, Derrick, Koval, 2010).
For example, in the prolific audit judgment and decision-making (JDM) literature, only four studies (based on laboratory experiments) have, to our knowledge, examined the impact of affective states on the formation of audit opinions. Bhattacharjee and Moreno (2002) established that when provided with irrelevant, negative affective information, inexperienced public accountants tend to overestimate the risk of inventory obsolescence, while experienced professionals do not. Schafer (2003) reached a similar conclusion in respect of the fraud risk assessment. Chung, Cohen and Monroe (2008) demonstrated that positive-mood auditors have the lowest consensus and make the least conservative judgments when required to evaluate inventories. Finally, Cianci and Bierstaker (2009) indicated that public accountants in a negative mood often make poor ethical decisions.
Importantly, the above-mentioned studies are not only few in number: like most of the papers that have addressed the issue of stress in auditing, they also tend to present affective states as being mainly disruptive.[2] The assumption is that feelings are the antithesis of rationality. However, this assumption has been strongly challenged for at least two decades. As shown by many researches, affect and reason – far from being antinomic – are in fact interrelated (e.g,. Damasio, 1994; Putman & Mumby, 1993). Whether we like it or not, emotions inform all our choices, actions and interactions, for better or for worse, and are themselves profoundly influenced by our working environment (Domagalski, 1999; Fineman, 1996). From this perspective, emotions need to be thought of as a vital and permanent aspect of the workplace – an aspect that shapes, and is shaped by, organizational processes, through various means requiring further examination.
In this area, audit research has made scant progress. Although the survey by Garcia and Herrbach (2010) found that the audit environment produces a wide range of pleasant and unpleasant feelings among auditors, the way in which these feelings mold, and are molded by, the audit process remains under-researched. Since Humphrey and Moizer (1990), who were the first to emphasize the importance of ‘gut feel’ in auditor decision-making, only a small number of studies have increased our understanding of the subject: Pentland (1993) showed that public accountants cannot form an audit opinion without ‘getting comfortable’ and that acting ritualistically enables them to reach this affective state; Carrington and Catasús (2007) added that the production of comfort in audit teams requires ‘acts of creativity’ to remove a sufficient ‘amount’ of discomfort; some studies have drawn on these analyses to better understand the functioning of audit committees (Gendron & Bédard, 2006; Sarens, De Beelde, & Everaert, 2009; Spira, 2002); but beyond this, very little research has been conducted to enhance our awareness of the affective dimension of the audit process.
Yet comfort constitutes only a small part of the emotional experience of public accountants. This became particularly apparent to us in the course of an ethnographic study conducted in the French branch of a big audit firm, aimed at better understanding the work performed by auditors in the field. We found Pentland’s (1993) paper truly stimulating and sometimes observed auditors talking about comfort and looking relieved, but in the audit teams we monitored, signs of comfort nevertheless remained relatively rare. Instead, it was not uncommon for us to see our informants frowning, turning a bit pale or red, biting their nails, shaking their legs, getting irritable, looking drawn, sweating, taking pills against stomach ache, holding their breath, double checking one thing or the other, and so forth. Altogether, these behaviors were in our eyes more suggestive of concern than comfort, and our semi-structured interviews confirmed this interpretation.
As stated by the senior quoted in the epigraph, in real audit settings, comfort only arises at the very end of the audit task. ‘The rest of the time’, auditors seek to feel comfortable, but are generally inhabited primarily by fear. Of course, fear is not experienced by them all day long and varies in intensity from individual to individual and depending on the circumstances. It may simply take the form of a slight disquiet or degenerate into an oppressive anxiety. However, in general, public accountants have to deal with this emotion. The present paper aims to provide a better understanding of the role of fear in audit practice, focusing specifically on the following questions: 1) What exactly is it that auditors worry about? 2) How do auditors manage fear in the field? 3) How does fear shape, and how is it shaped by, auditors’ work activity?
To interpret our empirical data and present our results, we mainly used the psychodynamics of work theory developed by Dejours (1993). In adopting a perspective at once psychological and socio-constructionist, this theory provides an interesting insight into the interplay of fear and work activity. Drawing on field studies conducted in a range of industries, Dejours (1993) argues that ‘fear is present in all kinds of professional tasks, including in […] office jobs’ (p. 81). He highlights the reasons why working generally tends to be a source of fear and indicates how this feeling usually shapes, and is shaped by, official work prescriptions and unofficial techniques and processes. Based on Dejours’s rich and well-documented reflections, the present study of fear in auditing may be seen in some sense as a psychodynamic interpretation of audit work. In this respect, our findings are not entirely specific to the audit profession. To a large extent, they reflect what working involves in practice and resonate with the findings of many studies of fear conducted in other sectors of activity.[3] In a sense, this reinforces the plausibility of our results and provides ‘a reminder that financial auditing is performed by people doing a job like any other’ (Power, 1999, p. 37). To date, the role played by fear in this particular ‘job’ has not, however, been studied, and our paper needs therefore to be seen as exploratory.
In the post-Enron climate and after the enactment of the Sarbanes-Oxley Act – which is the time and regulatory context of our field study – the professional risks associated with auditing and the non-accounting consequences of sensitive audit decisions have increased dramatically (Malsch Gendron, 2013). Being attentive to news, calculating, learning from experience and making decisions on the basis of a mix of trust and distrust, the average auditor has found himself ‘beset by risks’ (Gill, 2009, p. 82). Would his firm lose the audit? Would his reputation be damaged? Would his career suffer? If one considers that fear is the emotional experience of risk, our observations suggesting that this emotion is largely experienced by auditors in the field should hardly come as a surprise: fear and risk are closely related phenomena (Furedi, 2007). Lupton notes (1999, p. 17) that ‘risk has come to stand as one of the focal points of feelings of fear, anxiety and uncertainty’, while Power (2007a, p. 180) observes that ‘the significant driver of the managerialization of risk management is an institutional fear and anxiety’. Yet, while generally associated with the perception of risk, the subjective experience of fear and the role that fear plays in risk management processes are most often overlooked in the literature. The focus tends to remain on the notion of risk rather than on the study of fear. In this respect, our analysis on the role fear plays in the audit process aims to ‘emotionalize’ and challenge the dominant cognitive orientation adopted by academics and regulators in their understanding of audit risks and auditors’ skepticism. It is designed as a response to the many recent calls for a richer understanding of actual audit practice, which remains poorly understood (e.g. Gendron & Spira, 2009; Hopwood, 1996, 1998; Humphrey, 2008; O’Dwyer, 2011; Power, 2003; Skaerbek, 2009). Ultimately, it contributes to the growing interpretive literature seeking to ‘question rationalized accounts of the audit judgement process, and to explore the complex “back stage” of practice in its social and organizational context’ (Power, 2003, pp. 379-380).
The remainder of the article begins by providing a detailed outline of our research methods, before expounding our theoretical lens in more depth. Four sections are then devoted to presenting the results of our analysis, and the implications of the latter are finally discussed.
Research methods
Data collection
The data reported and analyzed in this paper were collected as part of a grounded interpretive field study (Glaser & Strauss, 1967; Van Maanen, 1979) on the work performed by auditors in the course of their assignments. The broad objective of the study was to identify and better understand key aspects of audit practice that official audit prescriptions do not address.
As part of this goal, we secured the consent of the French branch of a Big Four firm (CAB) to observe several of its audit teams in their work. The precise number of audits to be observed was not determined in advance. It was agreed that we would examine as many audits as necessary to reach theoretical saturation (Glaser & Strauss, 1967). Ultimately, a total of 7 audit teams, including 44 auditors (9 partners, 5 managers, 11 seniors and 19 assistants), were monitored in real time in June and July 2002 and between November 2003 and July 2004. The main criteria used for their selection was one of diversity (in terms of industry, firm and audit team size, geography, engagement type and duration).
In May 2002, as a preamble to our fieldwork, we began by examining the various rules imposed on French auditors by the CNCC (Compagnie nationale des commissaires aux comptes) and the state, as well as the formal prescriptions in force within CAB. We focused in particular on the audit methodology, the standards of documentation, the evaluation criteria and the roles imposed by the Big Four on its employees. The following month, we were ready to begin the monitoring process, which included participant observation (Spradley, 1980), examinations of work papers, informal discussions and semi-structured interviews (Spradley, 1979).