The effects of a client's political connections on auditors' judgements

Abstract

This thesis investigates the effects of a client's political connections on auditors' assessments of business risk, fraud risk and error risk, required audit effort and recommended audit fee in an experimental setting. Using a 1 x 3 between subjects design, political connections is manipulated at three levels: (1) ruling party connections; (2) opposition party connections; and (3) no political connections. A sample of auditors was presented with experimental case materials containing one of the three treatments and additional background information about an audit client. After the auditors read the case materials, they made an assessment of the client's business risk, listed the factors that increased and decreased their assessment of the client's business risk, assessed the client's fraud risk and error risk and made a judgement of the amount of audit effort required and indicated the audit fee they would recommend that the client be charged.

The results indicate that auditors in the ruling party connections group are more likely to list political connections as a factor that decreases a client's business risk, while auditors in the opposition party connections group are more likely to list political connections as a factor that increases a client's business risk. Auditors' assessments of business risk are higher for a client with ruling party or opposition party connections compared to a client with no political connections. There is no significant difference in the business risk assessments of the ruling party and opposition party connections groups. Average fraud risk assessments are higher for a client with ruling party or opposition party connections compared to a client with no political connections but not significantly different between a client with ruling party connections and one with opposition party connections. Error risk assessments are higher for a client with ruling party connections than for a client with opposition party connections or no political connections. Clients with ruling party connections are allocated higher levels of required audit effort and higher audit fees are recommended compared to a client with opposition party connections or no political connections. The assessments of the audit effort required are higher for a client with opposition party connections compared to a client with no political connections. However, there is no significant difference in the average recommended audit fee for a client with opposition party connections or no political connections. Show more