Dysfunctional Audit Behaviour: The Effect of Budget Emphasis Leadership Behaviour, and Effectiveness of Audit Review Halil Paino, Azlan Thani Universiti Teknologi MARA Pahang, Malaysia E-mail: firstname.lastname@example.org Tel: +60193992676 Fax: +6094602245 Syed Iskandar Zulkarnain Universiti Teknologi MARA Pahang, Malaysia Abstract Dysfunctional audit behaviour is an accepted problem, associated with decreased audit quality. This study develops and tests a theoretical model that identifies factors contributing to dysfunctional audit behaviour. Budget emphasis, leadership behaviour structure and consideration, and effectiveness of audit review were examined as antecedents of attitudes toward dysfunctional audit behaviour. A path analysis from a partial least square (PLS) approach was employed based on survey results from 225 Audit Managers in Malaysia. The findings produced consistent evidence in support of the theoretical model. It is not an emphasis on meeting budgets that leads to undesirable behaviour, but contextual variables, such as leadership behaviour structure and effectiveness of audit review. The results of the study should impact auditing procedures, hiring, training and promotion decisions, and help to minimize the occurrence and acceptance of dysfunctional audit behaviour.
Keywords: Dysfunctional Audit Behaviour, Budget Emphasis, Leadership Behaviour Structure and Consideration, Audit Review
The panel on Audit Effectiveness, established by AICPA’s Public Oversight Board to examine the issue of audit quality, gathered information from peer reviews and a survey of financial executives, internal auditors, and external auditing professionals. Their findings indicate that Dysfunctional Audit Behaviour (DAB) is a continuing concern for the auditing profession. This conclusion is significant because dysfunctional audit behaviour can adversely affect the ability of public accounting firms to generate revenue, complete professional quality work on a timely basis and accurately evaluate employee performance. The present study advances Malaysian auditing research by examining the specific factors that contribute to this behaviour including budget emphasis, leadership behaviours and effectiveness of audit review. In early 2007, the MIA Practice Review Committee issued the first ever Practice Review (PR) report undertaken by MIA, for the period 2003 to 2006, and highlighted some audit quality problems when judged against International Standards on Auditing, Malaysian Standards on Auditing and Companies Act 1965 requirements. These concerns have not been ignored in the academic literature. The underlying premise of much academic research has been that DAB is a dysfunctional reaction to the environment (i.e., the control system). This behaviour can, in turn, have both direct and indirect impact on audit quality. Behaviour that directly affects audit quality include premature signing-off of audit steps without completion of the procedure (Otley and Pierce, 1995; Rhode, 1978; Alderman and Deitrick, 1978), 436
European Journal of Social Sciences – Volume 21, Number 3 (2011) gathering of insufficient evidential materials (Alderman and Deitrick, 1982), processing inaccuracy (McDaniel, 1990), and the omission of audit steps (Margheim and Pany, 1986). Underreporting of audit time has also been shown to have an indirect impact on audit quality (Smith, 1995; Kelly and Margheim, 1990; Lightner, Adam and Lightner, 1982). Underreporting time leads to poor personnel decisions, obscures the need for budget revisions, and results in unrecognised time pressures on future audits (Donnelly, Quirin and Bryan, 2003). Several academic studies have also examined the impact that time pressure has on dysfunctional behaviour (Alderman and Deitrick, 1978, 1982; Margheim and Pany, 1986; Rhode, 1978). Kelley and Margheim (1990) examined the moderating effects of...