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City, University of London Institutional Repository Citation: D'Silva, K. (1992). External auditor independence: selected group perceptions. (Unpublished Doctoral thesis, City University London)

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EXTERNAL

AUDITOR

INDEPENDENCE:

SELECTED GROUP PERCEPTIONS

Thesis

submitted

Kenneth

E.

the

Doctor

J.

volumes

by:

FCA CA(Can)

degree of

two

D'Silva

MSc

BCom(Hons)

for

in

of:

Philosophy

to: City

University

London,

England

Research

conducted

Department City

of

Accounting

University

Frobisher London

at:

Business

Crescent,

and

Finance

School

Barbican

Centre

EC2Y 8HB

England

January

1992

1

02025-248k

EXTERNAL

AUDITOR

SELECTED

GROUP PERCEPTIONS

VOLUME

11

INDEPENDENCE

(EAI):

OF Il

VOLUME II

Page

TABLE OF CONTENTS - VOLUME Il

2

LIST

OF TABLES - VOLUME 11

4

LIST

OF APPENDICES

6

- VOLUME 11

CHAPTERS EXPECTATIONS X GAPS AND EXTERNAL AUDITOR INDEPENDENCE 10.1 Expectations gaps and the present research 10.2 The factor to expectations approach gaps 10.2.1 The reliance factor 10.2.2 The relationship factor 10.2.3 The pressure factor 10.2.4 The involvement factor 10.2.5 The management factor services advisory 10.3 Chapter summary

XI, 11.1 11.2

xii 12.1 12.2 12.2.1 12.2.2 12.2.3 12.2.4 12.2.5 12.3 12.3.1 12.3.2 12.4 12.5 12.6'-

SIGNIFICANT OF EXTERNAL Inter-group Intra-group

GROUP DIFFERENCES IN PERCEPTIONS AUDITOR INDEPENDENCE differences of EAI perceptual differences of EAI perceptual

THE UNDERLYING DIMENSIONALITY OF EXTERNAL AUDITOR INDEPENDENCE The appropriate methodological approach Factor (FA) analysis Statistical overview Principal and Factor component analysis important Other in using FA considerations Factor analysis and the research objectives Amenability to factor of data set analysis The underlying dimensionality of EAI cognitive complexity Integrative complexity Empirical results Reification and framework mapping Concluding remarks

2

7 7 21 22 29 39 45 57 63

74 75 92

112 114 117 117 119 120 123 124 125 129 130 132 142 145

Page xiii

13.3.6 13.4

THE MAIN GROUP DISTINGUISHING FEATURES OF EXTERNAL AUDITOR INDEPENDENCE Understanding differing group perceptions independence of external auditor Important statistical considerations on LDA bases The respondent (judgements) The responses analysed The validity LDA of using discriminant Linear analysis results Discriminating external auditors v. bankers Discriminating external auditors v. credit managers Discriminating external auditors v. internal auditors Discriminating issuers v. users of audit reports Discriminating Big-Six v. nonBig-Six auditors Discriminating EAs v. BAs v. CMs v. IAs Summary conclusions and implications

xiv

PERSONAL

14.1 14.2 14.2.1 14.2.2 14.3 14.3.1 14.3.2 14.3.3 14-3.4 14.4

ON EXTERNAL AUDITOR INDEPENDENCE The multiple linear regression methodology The variables for the regression equations The independent variables The dependent variables The regression models External auditor group regression models Banker group regression models Credit manager regression group models Internal auditor group regression models Summary and implications of regressions

199 200 201 202 210 214 214 215 217 219 221

XV 15.1 15.2 15.3 15.4

SUMMARY AND CONCLUSIONS Limitations of the research Significance and main findings of research Possibilities of further research Recommendations derived from the research

225 225 228 239 240

13.1 13.2 13.2.1 13.2.2 13.2.3 13.3 13.3.1 13.3.2 13.3.3 13.3.4 13.3.5

CHARACTERISTICS

153 155 156 156 158 158 161 161 169 172 177 180 187 191

AND GROUP VIEWS

APPENDICES

243

BIBLIOGRAPHY

259

3

LIST

Table 10.1

10.2

10.3

10.4

10.5 10.6

OF TABLES

-

11.3

11.4

11.5

11.6

11

PAge

Title

Table

No.

re.

concern

expressing

of groups in situations

EAI 68

% of groups expressing EAI in situations % Users/Issuers EAI in situations

no

concern

re. 69

concern

expressing

re. 70

based on their Rank of situations group mean levels of concern with or assurance in EAI (concern to assurance)

71

Ranked means of to situations

72

Ranked % of in situations significant (@ 05) . Refined

11.2

VOLUME

refined

group

concerned

groups

responses with

EAI 73

(NS) differences (S) Or not t-test: t-value on and and MLC responses group

81

(NS) differences (S) or not Significant test: Mann-Whitney (@ 05) and z-value on . Refined and MLC responses group

83

for ANOVA-related refined statistics from to questions responses situation four groups all research

85

based (@ . 05) differences Significant t- and F using MANOVA on Hotelling's to sets group responses of refined situation questions

on 89

Significant (S) or not (NS) differences (@ 05) on MLC and refined responses . the external within auditor group

100

(S) Or not Significant (NS) differences (@ 05) based on Hotelling's F tand . MANOVA on sets using group of refined to situation responses questions

106

12.1

Selected

12.2

factor Initial and eigenvalues:

group

factor

analysis

loadings, External 4

results

Communalities auditor group

126 134

LIST

Table

12.3

12.4

12.5 12.6

12.7

OF TABLES

-

No.

(ContinUed)

II

VOLUME

Table

Title

Page

factor Initial and eigenvalues:

loadings, Banker

communalities group

factor Initial and eigenvalues: Internal auditor

loadings, Credit groups

communalities manager and

135

136

Oblimin refined

factor rotated Ext. responses:

loadings auditor

Oblimin refined

rotated responses:

Oblimin refined Internal

factor loadings >0.5 rotated Credit responses: manager and auditor groups

>0.5 group

factor loadings Banker group

>0.5 139

12.8

Intra-group

factor

13.1

Discriminant v. Banker

model group

Discriminant v. Credit

model 2: External group manager

auditor

3: External group

auditor

13.2

13.3

Discriminant V. Internal

External

model auditor

4:

Issuers

Discriminant

13.5

Discriminant model 5: nonBig-Six Big-Six External group auditor

14.1

14.2

14.3

14.4

14.5

Discriminant Banker v.

auditor 163

13.4

13.6

140 141

correlations 1:

138

model

6: v.

model Cr. Mgr.

Ext. Int.

independent Dependent and Summary statistics

170

173 v.

auditor auditor

Users

178

v. 182 v. group

variables:

189

212

Correlations: variables

Dependent and independent EA group regression - Multiple

213

Correlations: variables

Dependent and independent BA group regression - multiple

216

Correlations: variables

Dependent and independent CM group regression - multiple

218

Correlations: variables

Dependent and independent IA group regression - multiple

220

5

OF APPENDICES

LIST

VOLUME

-

Appendix

A-

List

Appendix

B-

The

research

Appendix

C-

Top

Twenty

thesis 0

This the

auditor.

are

to

external

context,

auditing

equally

to

without

immediate

Appendix

the

A of

because

persist legitimacy give Loye,

"Quis

1990:

Decimus

the

not

auditor to

repugnant

masculine

only,

abbreviations

of

and

references

are

in

used).

ions

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have

legitimacy,

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perceptions

of

it

used

provided

abbreviations

can take

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apply

are

and even military

political they

auditing

such

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(List

II

258

external

clarification,

and they

People

people.

away. "

[Eisler

and

37]

custodiet

guardians

in

Where

comes from

legitimacy

the where

feminine.

economic,

stated,

and

made

Volume

to

reference

otherwise

references

firms

UK auditing

Additionally,

respectively.

247

questionnaire

frequent

Unless

243

used

abbreviations

of

makes

Page

Il

ipos

themselves? Junius

custodes? ] from

Juvenalis,

" -

Satires

(Who is VI,

Roman satirist

6

to

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guard

written (60-130

by A. D. ).

X

CHAPTER

EXPECTATIONS

GAPS AND EXTERNAL

The purpose consider,

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the

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INDEPENDENCE

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US).

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gap between

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that

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10.3

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expectation Table

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68).

frequency

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Table

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expectation in

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the

users

and audit-users, stated

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5.

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microcosmic

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individual

(Page

70).

in

differences between the

issuers

percentages

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Table

10.3

(Page

70).

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While

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4412),

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cease firm.

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employer-

client that

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is

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17

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As a consequence,

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an expectation 57

Less of

situation.

expressed

a degree

no

caused

EA and BA groups.

registered the

of

provision

company

3. Respectively,

noted

Thus,

to

statements) in

that

CM and IA groups

groups

(essentially

services

client,

two groups

concern. share

to

with

certain

providing

audit.

with

these

firm

revealed

services

and

factor

financial

corporate

findings

accounting

be only

services

annual

annual

clients,

basis.

keeping

the

of

audit

should

an audit

record

(private)

performing

and their

adviso]CZ

with

that

reiterate

specifically

and permissible,

UK

ICAEW (and other

by the

auditors

so that

statements,

audited

of

issued

guidance

bodies)

auditing

users

helpful

be of

to

appears

two groups

concern and 63.7% EAI appear

gap on the

issue-

lack

The

both

of is

groups

also

these

CM and

the

IA

the

While

issue

the

EA and

from

the

expressed

corresponding

third

quartile.

its

on

comfort

is

this

cause

no real

on

stand

by

manifest

weak concern

generally

BA groups,

their

the

may take

(lowest)

concern

in

seen

into

falling

profession

this

is

of

ranking

first

the

BA

EA and

quartile

intense

more

groups

ranking

quartile

the

into

falling

Equally,

the

by

the

with

concern

evidenced

groups

quartile. by

underlying

for

overall

complacency.

because

Firstly,

by

expressed because

more

average,

just

registered

the

all than

are

concern

the

is

concern

expressed

involvement

annual

these at

Situation

by IAs

all

(and

user

groups)

on

accounting by

the

in

3 were

statements".

auditor.

the

that

only

to

Further,,

and CMs when interpreted

do not

by the

fact

groups

disturbing

financial

groups

when

provided

in

and preparation

subsequently

EAI

with

particularly to

IA

in

Secondly,

groups.

three

all

of

was

concern

CM and

(concurrently)

"the

mean that

of

research

half

under

prepare

they

half

referred

services

creation

four

some concern

services

This

some level

audit of

wish

58

may

see any

profession

financial

audit.

to

the

in

statements

the which

In

terms

of

user

do not

research

where

study,

the

with

the

perceptions, really

those

echo

as much

80% of

as

results

users

[1980]

Firth

concern

registered

independence

professional

the

of

this

of

the

of

relevant

auditor.

on the

Dykxhoorn the

user

in

similar

groups

[1982),

expressed

study

concern

those

echo

30% of

only

where

the

of

EAI

underlying

with

circumstances.

findings

present

Lavin's

[1976]

study,

discontent

of

results

of

47% of

users

their

expre: ssed

same professional

financial

client's

the

a total

statements

the

with

do resemble

wherein

financial

audited

the

do they

neither

Sinning

and

However,

of

hand,

other

statements

preparing

auditor and

then

auditing

them.

However, the

whereas

Lavin

that

study

and

Auditors EAI

in

in

Dykxhoorn

36% in

the

Firth

in

that

only

study,

concern 21% of a level

registered

comparable

Sinning

and

about

situation.

59

group

with the of

in

with did as

situation,

[1980]

less

Auditor some concern

a similar

the

surveyed the

External

registered

significantly

issue,

the

in

group

revealed EAI

study

independence

auditor of

[1976]

64% of

[1981b] this

research

the

underlying

External concern

with

58%

This

present

47% of

average

of

auditor

independence

also

all

the

prepares limited

rather

indicated

research

such by user

financial

for

statements by

the

when

groups,

(21%)

concern

external

with

groups)

(an

concern

notable

auditor

audit,

and

auditors

professional

themselves.

basis,

on that their

auditors

independence

income

does

their

to

appear

professional

related

these

in

faith

strong

accounting

services

also

their

colour

fee

provide

perceptions

of

own EAI.

Internal

Auditors in

EAI

with

expressed

in

Situation

3.

some measure

the

given

each

and

that

eyes

of

appeared than

More

of

of

the

the the

related groups)

very

60% of

an expectation

users

of

may wish

continuing

to

of

companies

private the

permit

relevant

strong

concern

perceived

by

basis

whole

profession

audit

particular

concerned

them in

gap,

terms

therein.

EAI,

Thus, of

not

that

have

their

retain

when providing

The fact

services.

of

to

own ability

to

appear

of

EAI

auditing to

is

user

professional both

prepare

statements.

60

in

the

UK audit

desirability

auditors

to

financial

respondents,

the

the

47%

average

credibility

services,

reconsider

only),

(on

(in and

of the then

case

Situation In

13

a situation, by

described

Firth

that

stated

the

concerned Thus,

like

very

(1980

not and/or

separateness consulting

and

auditing

assumption

may

well

underlying

perceptions

between one

Firth

finds

Firth's

1980 saw the

users

for

statistic

in

1980

study

dual

13 of

issuers

provision

worse,

in

facts

this

of

research,

audited (or

troubled MAS and

of

audit

1980.

study

that

concluded in

auditor

the

(at

research

that

situation

to

be non

statistic

in

this

was

41% of

perceived

the

the

(and The

only

was

61

all

similar)

comparable

surveyed in

whereas higher

60% of

48%.

auditors

auditor

independent,

research

least)

relevant

be non-independent.

this

concluded

Situation

less

firm's

situation.

difference

and

no

that

the

basic

now appear

the

to

circumstances

his

both

by than

services

Firth

and

statements

pessimistic)

users

(1980]

that

financial

this

that

assumed

the

so,

for

in

firm

autonomously.

of If

EAI

of

the

of

have

staffing

influenced

have

clearly

may

activities.

disregarding

However,

cut

facts

and

respondents

clear

13,

arms

audit

separately

all)

Situation the

1981),

and

maintained

(if

present

and

consulting

were

some

the

at

the the

in

equivalent comparable

24.2%.

Finally,

(1980]

Firth

study

the

showed

perceptions 1981,

do not

of

EAI

as

in to

to

respondents infer

that

to

results

twenty

optimistic

quarter

of

is

not

that,

as with

the

the to

by

evident issuers

Both

research.

survey

as those

EAI

of

user

assessment

groups

there with

quartile.

and in

EAI

with

concern

an underlying

those

of

The weaker is

a comparable

in

and second

CMs and IAs concern seen

than

with

in

their

quartiles. 62

the

a

about

only

In

gap.

half

of

the

gap.

ranking

falling

the

held

expectation less

somewhat

expressed

with

the

of

majority

EA group

EAI,

of

was consistency

EA and BA groups first

the

researched,

on average,

Again,

the

this

This

survey. with

situation) to

it

by

varying

registering

contrast,

gaps,

some evolution

degrees

showed

situations

three

research

in

troubled

like

13.

Situation

more

in

this

respondents

present

the

50%.

no concern

the

in

under

[1981)

is

auditor

a MAS provided

main,

be as

the

be just

been

(within

Firth's

registered

users

has

all

users

independent, to

the

there

respondents

The

there

appear

that

be not

same statistic

may be that

since

61% of

concluded

would

circumstances

It

(at-least)

whereas

of

into

EAI displayed respective

group

the

third by the

ranking

in

dual

The

in

confidence

of

EAI

and that

the

profession.

ChaRter

10.3 EAI

is

focused

in

Given

set

of

are

An important

for

the

situations

the

This

is

because

in,

in

response some concern

the

is

the

issue

the

and two

all

these

each

EAI.

63

issues.

(with

-

situations external the

more concern

twenty with,

independence.

situations,

was a negative

to

21 31 10 and 13

of

auditor's

basis

that

fact

within

the

with

is

underlying

on average,

of

scope

the

group),

research

EAI-related

- ll

group,

to

task

classifying

so there of

situations

Auditor

provoked,

assurance

and

obtained

Banker

of

aspects

wide,

five

of

than

least

several

issue.

the

ICAEW (1987],

is

independence

auditor

many

this

issues,

representative

External

and 7 for

by

an immense

encompassing

the

finding

exception

refined

by

issues

the

these

addition

they

believe

all

to

out

is

it

on only

twenty

these

afresh

containing

that

twenty

spelt

as

audit

of

users

be considered

subject,

perceptions

However,

the

half

summary

issues.

obtain

still

audit

about

must

a multi-faceted

related

has

with

lack

services, audit

MAS and

of

provision

a lack

evokes

value,

the

mean

indicative

of

at

that

Admittedly,

(Situation

-1.78 05 .

(Situation

the

twenty

in

EAI

The

second

that,

in

the

the

the was

not

in

and

difficult

gaps

of

to

lowest),

groups

situations,

to

that

situations

suggested

issues, these

EAI

issues

ICAEW to

pertinent

all

underlying

by

EAI.

viewed than

rather their

not

that

[1987])

as wide).

of

twenty

the

EAs.

concern

with

external

or

more

of

categories

evident

(for

example, related

some precise was

across

evident is

it

individual

64

their

BAs and

Concern

basis.

within

CMs,

As such,

within

e.

expectation

e.

classifications

on an

(i.

and consistency

as IAs,

classifications. are

(i.

was predominant

embodied

-

groups

towards

conclude

among

widespread

or

were

extent

ranked

independence

auditor

Banker

of

fact

the

groups

negative

strong

terms

(highest

concern

basis,

as

is

Auditor

- most

expectation

When ranked,

that

widest

Auditor

External

Internal

-

concern

was highest

EAI

with

of

each

of

light

to

comes

of

groups.

research

that

and

As such,

some level

evoked four

a low

to

Auditors)

Auditors).

concern

Manager

Concern

is

Ext.

the

of

general,

comparable

It

Internal

phenomenon

revealed

gaps).

4 for

a high

from

varied

concern

situations

one

Credit

they

of

15 for

least

at

level

issue of

that

likely by

issue

classification

in

lowest

The

(auditor

concern

15 year

with

budget

that

these

when

or

were

(with

rankings,

to

basis,

on a similar

on one

reliant

The third

gaps)

of

concerns

for

ranked

(Table

10.6

were

Situations

On the the

would EAI

same basis, 3 of

suggest issues

for

all

four

end

of

for

and 12

his

the

groups.

the

among

a printing

stationery

(auditor income)

fee

total

those that

fact of

the

same for

the

tended of

views

to

echo

each

BAs and EAs.

This

intensity

when the

twenty

on Page 73),

the

ten

rankings

of

for

rankings them

these

of

second 1,9

65

of

the

(i. e.

them

consistency

pairs

of

and 20).

the

(Situations

of was

situations

10,11,12,14,15,17

an element

between

was that

CMs and IAs

each

the

1.4,51

same for

the

either

exception)

10% of

as did

group

pair

from

response

be highest

manifest

by the

substantiated

first

drawn

under

lowballing).

more closely,

other

is

client),

for

phenomenon

(expectation

(auditor

other

to

stationer

client

(auditor

14

the

at

having

his

with

agreement

one

appeared

4 (auditor

10

mean refined

be ranked

but

concern

Situations

is

the

last

second

and

conclusion

ranked,

situations

last

and

This

pressure).

fact

tenure)

1

Situations

was with

manifest

groups.

pair

and 12). in

were This

approach

to

Examining

how the

not

one observes

met),

twenty 1.

research

the

for

the

expectations

that

left

are

gaps

negative

instances

This

and

that

of

may well

consistent gaps greater

more

with

were for

evident, user

audited Issuers

of

only

facts than

In

groups

than

words,

66

an gaps

in

a gap

where

for

about

expectation

to

intensity

gap.

criteria

may cause

anticipations,

was not

expectation

both other

of

revealed

and

satisfaction

their

direction

issuers) and

off

that

their

have

the

facts

trigger

audit

fulfilled.

a positive

same

of to

appear

situations

over-satiation.

cause

not

statements

users

twenty

is

of

also

(both

the

terms,

expectation

also

it

anticipations,

can

but

instances,

partially

a level

environment areas

the

of

gaps

groups,

user

fulfilled.

- all

of

suggests

audit

users

derived

expectation only

the

only

to

contrary

each

expectation

the

certain

instances,

some

expectations

audit

to

respect

(or

met

group.

partially

in

reports,

in of

for

only

issuer

that

suggests

with

anticipations,

not

audit

This

that

derived

detected

were

were

expectations

situations:

to

contrary

'a priori'

audit

to

some,

others.

(negative)

was always the

issuer

group.

This

that,

suggests

dissatisfaction

This

the

underlying

section

Concern

with

National

Westminster

July

and

to

meet

public

to

step

in"

of

legal

This

chapter

has

group

by

reflected

both

of each

the

drawn the

three

professions government

of

the

quantified

three

the

to

to

told

proof

of

audit

4].

11,1991:

now well of

fail

forced

be

would

July

is

gaps

on EAI

fact

the

["Profession

Age,

groups

of

"continued

(statistically) views

to

duties

legislation

offered

chairman

attention have

is

auditing

Alexander,

expectation

identifies

and

in

- Accountancy

of

differences

for

auditors

initiate

threat"

chapter

implications

expectations,

existence

as

were

drew

Bank

if

that

The

-

Some conclusions

Lord

and

and

A

chapter.

identification an

with

gaps

1991,

bankers

public,

the

expectation

In

both

of

gaps

considered.

current.

that

section

and their

profession

auditing

expectation

gaps.

findings,

these

from

The basis of

itself

concerned

gaps

existence

first

expectation

such

of

the

audit

issuers.

than

examining

situations.

possible

in

was assessed later

EAI-related

to

of

extent

among users

itself

has confined

twenty

the

evident,

was greater

chapter

within

where

accepted. these The

users.

gaps next

significant between user

67

each

groups

of

the

individually.

issuer

TABLE

10.1

% OF GROUPS EXPRESSIM

Sitn.

External

CONCERN RE.

Bankers

Auditors

EAI

IN

SITUATIONS

Credit

internal

All

Mgrs.

Auditors

GrOuRs

1

15.0

24.7

29.1

33.9

27.9

2

27.5

35.8

59.8

51.8

48.6

3

20.8

27.1

50.3

63.7

47.4

4

62.5

59.2

80.7

82.1

75.5

5

45.0

34.9

35.6

38.3

38.1

6

31.9

39.5

66.8

53.2

52.7

7

26.6

21.0

45.1

44.2

38.8

8

31.7

34.6

44.3

37.5

38.5

9

38.3

39.5

57.3

51.6

49.9

10

12.5

27.1

33.6

34.7

29.6

11

29.2

63.0

68.3

64.0

59.4

12

84.2

64.2

69.2

70.5

71.7

13

24.2

39.5

51.3

58.9

48.0

14

49.2

56.8

80.7

71.3

69.1

15

55.0

40.8

55.8

53.0

52.9

16

32.6

37.0

34.0

43.4

37.5

17

55.8

38.3

46.3

49.6

48.2

18

54.6

34.6

44.6

51.0

47.5

19

31.7

46.9

50.6

47.4

45.7

20

39.2

40.7

57.4

53.6

50.9

68

TABLE

10.2

% OF GROUPS EXPRESSING

Situ.

External

NO CONCERN-RE.

Bankers

Auditors

EAI

IN

SITUATIONS

Credit

Internal

All

Mgrs.

Auditors

Grouva

-

1

85.0

75.3

70.9

66.1

72.1

2

72.5

64.2

40.2

48.2

51.4

3

79.2

72.9

49.7

36.3

52.6

4

37.5

40.8

19.3

17.9

24.5

5

55.0

65.1

64.4

61.7

61.9

6

68.1

60.5

33.2

46.8

47.3

7

73.4

79.0

54.9

55.8

61.2

8

68.3

65.4

55.7

62.5

61.5

9

61.7

60.5

42.7

48.4

50.1

10

87.5

72.9

66.4

65.3

70.4

11

70.8

37.0

31.7

36.0

40.6

12

15.8

35.8

30.8

29.5

28.3

13

75.8

60.5

48.7

41.1

52.0

14

50.8

43.2

19.3

28.7

30.9

15

45.0

59.2

44.2

47.0

47.1

16

67.4

63.0

66.0

56.6

62.5

17

44.2

61.7

53.7

50.4

51.8

18

45.4

65.4

55.4

49.0

52.5

19

68.3

53.1

49.4

52.6

54.3

20

60.8

59.3

42.6

46.4

49.1

69

TABLE

-10.3

% USERSJISSUERS

User

sitn.

Group

CONCERN RE EAI

EXPRESSING

* (1)

Ext.

GaR -

Auditor

Users

Auditors

(2)

GrouR

SITUATIONS

IN

1

29.2

15.0

14.2

2

49.1

27.5

21.6

3

47.0

20.8

26.2

4

74.0

62.5

11.5

5

36.3

45.0

(8.7)

6

53.2

31.9

21.3

36.8

26.6

10.2

38.8

31.7

7.1

9

49.5

38.3

11.2

10

31.8

12.5

19.3

11

65.1

29.2

35.9

12

68.0

84.2

(16.2)

13

49.9

24.2

25.7

14

69.6

49.2

20.4

15

49.9

55.0

(5.1)

16

38.1

32.6

5.5

17

44.7

55.8

(11.1)

18

43.4

54.6

(11.2)

19

48.3

31.7

16.6

20

50.6

39.2

11.4

* Average

of

Banker,

Credit

Mgr.

70

& Int.

Auditor

(1-2)-

Groups

TABLE

10.4

RANK OF SITUATIONS CONCERN WITH

Sitn.

External

BASED

OR ASSURANCE

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ON-THEIR

GROUP MEAN LEVELS (CONCERN

INEAI

OF

TO ASSURANCEL

Credit

internal

All

Mgrs.

Auditors

Groups

1

19

20

20

19

20

2

16

12

6

11

11

3

17

17

12

3

10

4

2

3

1

1

1

5

8

14

17

6

12

6

5

8

6

7

15

19

15

15

16

8

10

16

14

17

15

9

9

10

a

8

7

10

20

18

19

20

19

11

12

2

3

5

4

12

1

1

4

3

3

13

17

8

10

6

12

14

6

4

2

2

2

15

3

11

9

6

5

16

11

13

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16

18

17

4

7

13

13

9

18

5

14

16

12

13

19

14

5

11

14

14

20

7

8

7

10

7

71

is

16

TABLE

10.5

RANKED

Rank

MEANS OF-REFINED

EA9 la

BAs 2a

2b

1 -1.63

12

-1.04

12

2 -1.16

04

-1.00

11

3 -0.98

15

-0.95

04

4 -0.85

17

-0-90

14

5 -0.80

18

-0.49

19

6 -0.64

14

-0.48

06

7 -0.47

20

-0.46

17

8 -0.38

05

-0.43

20*

9 -0.35

09

-0.43

13*

10 -0.28

08

-0.42

09

11 -0-18

16

-0.41

15

12 -0.13

11

-0.36

02

13 -0.12

06

-00'26

16

14 -0.10

19

-0.21

18*

15 -0.05

07

-0.21

05*

16

0.07

02

-0.19

08

17

0.08

03*

-0.07

18

0.08

13*

-0.06

19

0.42

01

20

0.43

10

Columns Tie

3a

3b

-1.73

04

-1.68

14

-1.29

11

-1.14

12

-1.11

06

-0.91

02

-0.87

20

-0.85

09

-0.82

15

-0.73

13

-0.66

19

-0.61

03

-0.58

17

-0.55

08

-0.49

07

-0.43

18

03

-0.30

05

10

-0.27

16

0.03

07

-0.18

10

0.07

01

-0.09

ol

a=

Group

1 to

on another

5:

situation,

72

All

IAs

CKS

lb

TO SITUATIONS

GROUP RESPONSES

4a

4b

Sa

5b

-1.78

04

-1.56

04

-1.33

14

-1.29

14

-1.17

03*

-1.22

12

-1.17

12*

-0.96

11

-1.02

11

-0.81

15

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13*

-0.76

06

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*-0.71

09

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*-0.71

20

-0.83

09*

-0.64

17

-0.76

20

-0.63

03

-0.75

20

-0.62

02

-0.69

18

-0.60

13

-0.66

17

-0.56

18

-0.60

19

-0.52

19

-0.45

07

-0.42

08

-0.44

16

*-0.34

05

-0.43

08

*-0.34

07

-0.41

05

-0.32

16

-0.25

01

-0.08

10

-0.22

10

-0.04

01

Mean

:b=

also

so

Situation noted.

No.

TABLE

10.6 % OF GROUPS CONCERNED

RANKED

EAs

Rank

BAs

WITH

IN

EAI

SITUATIONS

All

IAs

cMS

la

lb

2a

2b

3a

3b

4a

4b

Sa

5b

1

84.2

12

64.2

12

80.7

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82.1

04

75.5

04

2

62.5

04

63.0

11

80.7

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71.3

14

71.7

12

3

55.8

17

59.2

04

69.2

12

70.5

12

69.1

14

4

55.0

15

56.8

14

68.3

11

64.0

11

59.4

11

5

54.6

18

46.9

19

66.8

06

63.7

03

52.9

15

6

49.2

14

40.8

15

59.8

02

58.9

13

52.7

06

7

45.0

05

40.7

20

57.4

20

53.6

20

50.9

20

8

39.2

20

39.5

06*

57.3

09

53.2

06

49.9

09

9

38.3

09

39.5

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55.8

15

53.0

15

48ý6

02

10

32.6

16

39.5

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51.3

13

51.8

02

48.2

17

11

31.9

06

38.3

17

50.6

19

51.6

09

48.0

13

12

31.7

08*

37.0

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50.3

03

51.0

18

47.5

18

13

31.7

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35.8

02

46.3

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49.6

17

47.4

03

14

29.2

11

34.9

05

45.1

07

47.4

19

45.7

19

15

27.5

02

34.6

08

44.6

18

43.4

16

38.8

07

16

26.6

07

34.6

18

44.3

08

44.2

07

38.5

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17

24.2

13

27.1

03*

35.6

05

38.3

05

38.1

05

18

20.8

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34.0

16

37.5

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37.5

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19

15.0

01

24.7

01

33.6

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10

29.6

10

20

12.5

10

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29.1

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33.9

01

27.9

01

A

Columns

a

of

*

Tie

on

1 to an(other)

5:

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situation

73

:b= also

Situation so

noted.

N o.

XI

CHAPTER

SIGNIFICANT

AUDITOR

EXTERNAL

The

GROUP DIFFERENCES

purpose

by

revealed

audit

differences, use

of

the

the

(M-W)

group

auditor

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identified

the

two

second

external

phenomena

(non-parametric)

the

external

the

three

user

of and

internal

auditors)

differences

(determined

group and

partners

v.

identified

and

and considering

both

differences, derived

first

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between

significant

are

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each

managers

section,

auditors

significant

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assessed.

auditor

identifying

to

mainly

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sections.

turn,

credit

classifications)

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in

and

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main

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(bankers,

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as

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significant

section,

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chapter

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t-test

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discuss

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chapter

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responses

(parametric)

Mann-Whitney

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refined

identify

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questionnaire

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chapter

group

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OF

PERCEPTIONS

INDEPENDENCE

this

of

IN

from

regard implications

(AT).

74

is

within

on Big-Six

V-

non-partners assessed.

sets paid

of to

flowing

these testable out

of

11.1,

Inter-grOuR

inter-group

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theory

and

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theory

contends

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then

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as previously

independence. little

independence

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the

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have

no role

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pivotal

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establish

theory.

agency

be and

(Benston,

own economic

312].

professional

and

external

an

on which

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value,

effects

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1986:

is

engaged,

first

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basis

independence

to

must

such

Zimmerman,

becomes

AT contends

an

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and

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thus

independent

1989].

no professional AT.

by

auditor

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auditor

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within

play

stated,

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of

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person

services

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forth

information

confirmed

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person

by

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of

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and/or

AT puts

service,

of

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so,

respective

conflicts caused

are

funds

EAI

of

inherent

the

"agents"

and

EAI

of

perceptions

that

"principals" in

differences

RerceRtual

and then

1975],

remain exploit and

in

so

"self-interest".

became evident

(known)

that

an auditor

were

independently,

no monitoring

contracts

would

him,

and in

as an auditor

time

he would

[Watts 75

be unable

and Zimmerman,

to 19811.

earn

Consequently,

agency

backdrop

the

theory

of

independent

suggests

and hold

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to

be so.

the

abovej

Watts

that

themselves

evidence

of

out

Zimmerman

(1981]

present

the

fact

conducted

in

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and

thirteenth

time

audits

when

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often

performed

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tend

independent Financial

else

view

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will

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held

by auditors

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perceptions (both

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individually Auditors

opens

services.

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general,

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issue

users of

76

of

EAI,

audit similar

own EAI.

differences between

and collectively) themselves

up"

as

groups

as independent,

about

this

EAI,

auditor

be no significant of

yet

12].

user

perceptions

to

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as Europe

in

will

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perceived

13,1990:

see the

AT implies

should

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of

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not

centuries imposed,

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themselves

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to

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or

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summary,,

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[Appendix

question

77

response

refined group same the B:

the

and

assessment Minimum 254].

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MINIMUM LEVEL OF CONFIDENCE in

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78

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level.

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11.2,

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and

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11.1

in

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confidence

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but

regard

of

responses

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personalised

inter-group

79

basis,

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each were

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12,13

A four

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41 61 10,

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1.21

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all

TABLE

11.1 OR NOT(NS)

SIGNIFICANT(S) t-TEST:

SITN.

REFINED

EXTERNAL

DIFFERENCES

AND MLC

GROUP RESPONSES

AUDITOR

USER GROUPS

& t-VALUE

(@. 05)

GROUP VERSUS

BANKERS

CR.

KGRO.

AUDITORS

INT.

-2.12

S -3.92

S

-4.99

S

-2.61

S -7.17

S

-6.19

-7.28

NS

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S -4.97

S

-9.10

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1.00

S -3.48

S

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5

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0.32

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0.90

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6

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S -7.00

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7

S

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0.52

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8

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0.52

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NS

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9

S

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S -3.49

S

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10

S

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S -5.40

S

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11

S

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S

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S -8.21

S

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12

S

S

S

13

S

-6.83

S

14

S

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NS

15

NS

16

NS

17

NS

1.97

S

2.14

NS

1.89

NS

1.30

18

S

2.44

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3.84

S

2.82

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0.87

19

S

20 MLC

1

S

-4.94

S

2

S

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3

S

4

3.97

1.34 -1.38

S

S NS

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S

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3.40

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3.08

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1.01

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NS S

0.77 -1.98

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NS

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is

there

Thus,

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in

perceptions different.

consistently

terms

of

Table

11.1

group

tended

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only

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the

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with

15 and

14

the

of (12)

of

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and

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fact, in

shows

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one

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8)

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20)

and

IA

of

them

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82

for

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the

results

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differences

M-W test

nonparametric

significant

given

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test

Mann-Whitney

the

6)

for

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the

TABLE

11.2

SIGNIFICANT(S) MANN-WHITNEY

SITN.

OR NOT(NS) TEST:

EXTERNAL

REFINED

AUDITOR

USER GROUPS

DIFFERENCES

(@. 05)

GROUP RESPONSES

& Z-VALUE AND MLC

GROUP VERSUS CR MGRB

S -4.54

S -2.03

S -3.76

S -4.90

2

S -6.32

S -2.20

S -6.86

S -5.48

3

S -6.46

NS -0.99

S -5.06

S -8.05

4

S -2.96

NS -1.07

S -3.20

S -3.45

5

NS -0.59

NS -1.04

NS -0.75

NS -0.05

6

S -5.76

NS -1.87

S -6.65

S -4.67

7

S -3.03

NS -0.59

S -3.39

S -3.22

8

NS -1.95

NS -0.30

S -2.44

NS -1.53

9

S -3.28

NS -0.42

S -3.62

S -3.10

10

S -5.38

S -2.97

S -4.81

S -5.23

11

S -7.64

S -4.76

S -7.48

S -6.57

12

S -4.29

S -3.96

S -3.70

S -3.62

13

S -6.66

S -3.27

S -5.59

S -7.00

14

S -5.99

NS -1.60

S -7.16

S -4.76

15

NS -0.98

S -2.40

NS -0.45

NS -0.58

16

NS -1.27

NS -0.56

NS -0.40

S -2.01

17

NS -1.89

S -2.17

NS -1.84

NS -1.21

18

S -2.54

S -3.57

S -2.84

NS -1-00

19

S -4.36

S -2.62

S -4.35

S -3.70

20

S -2.60

NS -0.09

S -3.15

S -2.26

MLC

S -4.61

S -2.30

S -4.85

S -3.89

83

INT

AUDITORS

BANKERS

Thusý,

group the

gave

results

same results

in,

In

turn,

this

ground

for

situations. provided parametric

and

M-W test

The

individually

In

with

desirable

to

differences

the

by their

obtain

statistic, variance

The relevant

The

coefficient the

measure

of

between

(possibly)

measures

have

the

group four

underlying

been

reflecting it

in

for

situations.

84

eta-

of

use

how much

of is

Table

explained computed.

11-3.

provide the

relationship Various

variables.

developed

such

was also

correlation

strength

associated

considered

a measure

groups,

of

was

responses

presented

measures

when

15 situations

and

ANOVA derived

underlying

of

(16

IAs

CMs and

how big

of

a measure

are

showing

situations

views,

produces

results

similar

more

of

situations group

into

chapters.

correlation

which

partition

of

differences).

significant

To do this

were.

later

between EAs

with

differing

significantly

of

than

identifying

(10

EAs

eta-sauared

to

addition

in

existence

BAs and

contrasted

ANOVA-derived

squared

the

results

application

tests

nonparametric

respectively,

The

legitimate

equally

between

in

tests

of the

90% of

consistency

differences),

significant

least,

at

corroborated

on EAI

views

obtained

types

both

from

in

specific

a

TABLE

11.3

ANOVA-RELATED SITUATION

STATISTICS

QUESTIONS

SITN.

F-VALUE

1

8.321

2

FOR REFINED

FROM ALL

RESPONSES

FOUR RESEARCH

SIGNIFICANCE

035 .

18.536

0000 .

075 .

3

30.956

0000 .

.

118

4

11.151

0000 .

046 .

5890

003 . 072

641

.

5

.

6

17.886

0000 .

7

7.605

0001

8

2.272

9

6.026

10

9.846

11

21.291

12

5.484

13

18.248

14

18.443

15

3.274

16

1.674

17

1.797

18

6.123

19

6.115

20

4.177

MLC

6.413

.

. . . . . . . . . . . . . . .

.

032

.

0790

.

0005

.

010 026

0000

041 .

0000

085

.

0010

.

0000

.

0000

.

023 073 074

0207

014 .

1713

007 .

1463

008

.

0004

026 .

0004

026 .

0061

018 .

0003

027

85

GROUPS

ETA-SQUARED

0000

.

TO

as is

However, to,,

the

and often

measured

in,

used

situations with

more than

correlation

coefficient

Concurring,

Norusis

one appropriate

where

one variable

several

and the

possibilities,

with

the

presently,

on a ratio-scale

measurement nominal

case

possible

is

(1988b:

R. et

B-103)

is

variable

other

two possibilities, (Mayntz

is

al.

the

1976:

eta 191].

states:

is appropriate "The eta coefficient in for data the dependent is measured which variable on an interval scale and the independent variable on a When squared, or ordinal nominal scale. eta can be interpreted as the proportion of the total in the dependent that variability variable can be for by knowing the values accounted of the independent is asymmetric The measure variable. between and does not assume a linear relationship the variables. "

As is

the

always

significance

attached

The significance factors,

reference the

the

strength being data

of

the

the

attached

to

that

number

of

groups

is

expressed

strength

being

appropriate

an indication between

the of

of

by to

ces.

relationship while

computed.

on a number

freedom"

of

of

depend

provides

degree

coefficient

dependency

circumstan

considered, about

the

"degrees

coefficient

eta

will is

be a level

will

the

overall

the

particular

Thus,

which

This to

to

levels

one of

considered.

there

case,

the

significance

certainty of 86

(or

relationship.

of

the

two variables level

probability)

provides

In

the

those

present

context,

responding

to

respondent's basis,

that level to

group

twenty

significance

of

in

as those

largest

eta-squared of

auditor). in

seen

Thus,,

of

occasion

the

smallest

than

05 was .

owning

shares

some overall of

The

largest

group

impact

group

most

terms,

responses

it

The 3 by

services (. 085)

or

was

by the

differences.

by

less

significance director

closeness

87

concurrent

on the-auditor,

with

(auditor

Situation

the

services

(. 014)

a PLC audited

to

05. .

Situation

appears

response

15

similarity

than

time-pressure

of

eta-squared

in

respective

(time-pressure).

frequent

Situation

large

eta-squared

and accounting

audit

unduly

inferentially

for

noted

audit/accounting

and the

auditor

less

concurrent

11

groups.

eta-squared

be as

significance

second

the

Thus,

was

four

16 with

may not

(. 118)

overall

provision

had

5 and

171). .

and

with

Situation

in

Situations

responses

the

situations

situations

helpful

(provision

some

significance

refined for

On

variable.

other

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the

while

F-ratio,

questions,

589 .

these

for

value

that

(e. g.

the

the

are

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situations, is

states

situation

significance

values

twenty

11.3

shows

dependent

membership

Table

11.3

Table

The

the

and, eta-squared

the

the

the

the

of

Thus,

auditor). of

view

15 appears

a trust

in likely.

terms

Inter-group

differences

Recognising

that

in

alone

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situation

only,

this

situations

in

sets

situation

correspond [1987]

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in

as

ICAEW were

potential

pressure

could

be

could

also

seen

as

by

the

differences turn,

each

group

being

Table

11.4

between of

the

that

facts.

within

together

statistic

F-value.

one

as

of

groups

with

the

88

of of

situations it

the

four

sets

document.

tested

was

on

significant

research

results

the

set

form

guidance

Auditor

all

the

each

above,

for

twenty

variable,

External

made up of the

in

ICAEW's

sets

while

[1987)

(MANOVA)

other

MANOVA-tests,

classifying

grouped

the

presents

and

its

independent

their

sets, basis

a multivariate

within

stated

as

a distinct

ICAEW in

four

grouped

so that

be categorised

identified

of

four

on EAI

by

the

of

each

classified

developed,

situations

Each

being

[1987),

(broadly)

to

suggested

on EAI,

appropriately

twenty

situations.

classification

guideline

the

examined

developed

situations

most

also

that

to

specific

classified

were

the

ethical

questionnaire that

of

sets

with

results

sets

an individual

of

chapter

situation

of

an examination

situation

These

terms

user of

(the

groups the

relevant

in

and,

group

last

such

together).

multivariate Hotelling's

t-

TABLE

11.4 (@. 05)

SIGNIFICANT

(H-t)

STATISTIC OF REFINED

DIFFERENCES (F)

AND F-VALUE

GROUP RESPONSES

S

EXTERNAL

BASED

ON HOTELLIVOIS

QUESTIONS

TO SITUATION

AUDITOR

ON SETS

NANOVA

USING

GROUP VERSUS

E

USER GROUPS

T

H-t

1

0.03

7.43

0.10

6.57

0.05

5.88

0.06

7.00

2

0.09

11.98

0.12

4.58

0.15

10.83

0.13

9.32

3

0.16

15.29

0.20

5.44

0.36

18.32

0.18

9.34

0.16

21.75

0.18

6.83

0.29

20.84

0.31

22.73

BANKERS

F

H-t

INT.

CR MGRS

F

F

H-t

F

H-t

AUDITORS

Notes: SET 1:

Refers three

SET 2:

to

(1,91

the

Involvement

three

external

(S)

differences

all

audit-user

auditor across

group all

and group

responses four

89

and

61 71 81

Factor

(10,11,

and

contains

& 20).

Factor 41

Pressure

situations

from

the

the

to

contains

Factor 17,19

(2,31

and

& 18).

Relationship

situations

Refers

Responses

(5,12

the

to

Refers

Factor

Reliance

situations

nine SET 4:

the

situations

Refers five

SET 3:

to

and

contains

13,14

& 15).

contains

16). when

compared

showed

situation

with

significant sets.

The MANOVA-tests differences

between

Groups. all

were

Without

sets

of

EAs and

(from

responses

significantly

different

The

implication

infer

to

any

one by

categorised

ICAEW

the

of

in

but

Groups)

that

are

sets)

of

the

aspects

were

EAs.

view

to

that

showed

the

of

specific

may reflect

audit-User

audit-User

serious

[1987],

significant

assessment

those

is

(or

set

that

situations

from

assess

of

all

differences

significant

only

each the

exception,

resulting

to

conducted

one

may not

confined

as

situations of

generality EAI.

of

Summaj:y The inter-group Firth in the

(1980:

the

findings 451]

who detected

perceptions

responses

and the

of

the

responses

of

Further, between

the

not

Indeed,

it

perceive significantly

of

borne

out

provides groups the

of

of

by

and

terms the

of

EAI

results

persons

difference of

of in

views

90

audited

implied this

with

situations from

by

those

of EAI, with

of

AT,

research.

a majority

concerned

same auditor-auditee different

statements statements-"

users

that

evidence of

financial

with

between

...

financial

of

accord

differences

no significant

issuers in

statements

largely

preparers users

"significant independence

auditor

assertion

theýviews

financial

instances,

of

much in

on EAI are

EAS.

is

establishing audit

Criticisms

of

about

anxious

4,1987: to

taken

22-23]

its

22 places

non-auditors Colman),

finance

to

Certainly,

is

to

and the

(Edinburgh

Dept.

these

in

of

light

representation

of

about

for

some avail, Auditing

of in

on the

be welcomed. 91

the

Practices half Such

non-auditors.

industry

(Reckitt

Trade

and Industry), Business

organisations.

generally

significantly

external

auditor

chapter,

Auditing

&

(the

and London

this

are

(EAI)II.

...

non-audit

the

perceptions as revealed

learnt

government

University

name some of

group

independence,

come from

Age,,

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C. C. A. B. has more than

(BZW Investment),

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of

by respected

filled

Commission

School)

1991)

up by the

currently

and academia

been to

of

is

little

are

any steps

users

perceptions

(April

established

the

of

users

- Accountancy "hardly

very

may have

(APB) set

auditor

views

and their

Board

differing

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and consequently

recently

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it. on

Report

["Audit

the

been made on

have

profession

states

of

rulings

statutory

Sikka

users made to

are

independence"

auditor

anxieties

Audit

UK audit

example,

Such criticisms

of

and/or

ascertain

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For

score.

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nonBoard

Intra-group

11.2

theory

Agency A school

of

auditing

auditors

in

larger

Loeb

[19751

In

this

is less

usually

are

individual

total

large),,

the

as large

not

Such

theorists

large

firms

because

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Loeb

to to

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relationships.

firm of

size

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an

within by

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behaviour

is

how auditors

independence

profession,

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of

their

that

a model

92

as

not

more

client

determination

auditing

firms

service

in

deviant

large

the

of

features

contends

analyse

individual

from

include

"cosy"

on their

on any

as clients.

(1975]

pressure

firms

large

operations

"personal"

the

for

firms

be inherently

more

be

to

that

for

case

some

When extrapolating (1966]

fees

Such features

EAI.

growth

situations.

profession,

hold

fact

proportion

have

to

that

large,

as

smaller-sized

them to

variable

react

Carlin

tend

offer

vein,

of

firm-size

smaller

a smaller

nature

cause

to

consequent

will

(mainly

also

to

keenness

In

than

is

on

[1981).

dependent

firms

prejudicial

Shockley

than

EAI

likely

more

not

by the

revenue

and

firms

and

form

usually

firm's

in

of

suggested

are

explained

client

clients

firms

those

example,

part,

has

theorists audit

than

based

differentiation

and

independent

differences

perceptual

the

states:

legal

to violate "Faced with client pressure Carlin's model would professional standards, be the indicate that the CPA's reaction would The first variable result of several variables. is the place in the organization of of the firm the accounting The accounting profession. (e. firms has g. economically strong profession do not depend on any one firms) that national for of their client a significant proportion firms billings. there However, gross are also important depend for that few an may on a clients is very fees. It proportion of their gross that to client pressure possible a CPA's reaction to the economic of his may be related stability (the CPA's) firm. " Loeb (1975: 846]

In

the

some of with

it.

firm

size

of

terms,

empirical

Shockley held

views

the

risk

related

degree

auditor

independence

A further

body

firms

large

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of

are

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expensive

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in

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assessment

firm

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size

impaired

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correlated.

literature

suggests

that

seen by investors

to than

reputation"

that

methods of

undertake,

an adequate

these

of

1980;

audit 1984

Francis,

1987].

ingredient to

factor"

[Simunic,

argues

do have

statements

view

negatively

are

size

concerned

groups

the

a "professional

and Stein,

(1981a]

DeAngelo

quality

auditing

auditors

four

possible

being

a smaller

and Simunic

to

risk

of

more of

possess firms

of

determined

785]

jeopardised;

being

EAI

of

in

that

"important

an

by

on EAI

He concluded was

[1981:

while of

and

93

of

audited

differentiating

which

surrogate

users

is so for

EAI), firm them.

audit such size

methods

often

one possible the

sale

manifestation new issues,

of

whose

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audit

firms,

higher

than

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effect

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(1991]

suggests

the

above,

is

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the

audit

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standards

higher

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Aranya

(1981:

in

were

small Pany

important

as reflecting

from

firms

are

seen

from

to

firms

by

and

Reckers

to

bankers

94

be

qualified (1985] when

see

stringent

not to

as large.

render

firms.

that

"more

EAI.

and

smaller

determined

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investors

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28]

is

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firms

firms

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competence

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than

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McKinley, is

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audits

audit

auditors

Canada. firm

investors,

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for

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audit

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et

interpretation

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capital".

common expectations. that

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in

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at

[Balvers

investors

firm

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firm

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of

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on by large

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issuers

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reputation

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been reported 1988)

are

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in

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where

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of

auditors

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in

conclude

that

assessing

EAI.

Lindsay's

(1989: detecting

Canada)

auditors

in

to

client

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much

the

318]

[1986:

the

two

differing

auditors

for

from

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(and by

revealed

more

research

also

significant

differences

by

from

The

auditors

123

research in

the

(external

External were Top

will

large

all

perception

firms

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employed

Fifteen

firms

auditors)

in

on EAI

of the

firms

UK (Appendix

as

as

that

Accountants C:

258].

are

shown

large.

in

participated

Chartered

95

there

on EAI, not

those

Hence,

that

firms

audit

than

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as

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views

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as

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are

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Zimmerman

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Watts

audit

firms,

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ying

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same context,,

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USA and

Australia,

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study

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If

1]

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the

six

of

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UK audit

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1],

were

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123

on that

as

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are

firms.

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96

was The

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(51

was:

perception

firms

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auditors,,

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situations,

Big-Six

30,

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auditor-auditee

auditors

(72

nonBig-Six

nonBig-Six

alternative

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firm

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differences

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two

alternative

the

of

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11.5

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11.6

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18

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105

TABLE

11.6

SIGNIFICANT

(8)

HOTELLINGIS

t-

REFINED

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OR NOT (H-t)

EXTERNAL

s

(F)

AND F-

EA GROUP RESPONSES

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0 OF

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AUDITOR

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BIG-SIX

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Hotelling's-t

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1

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v.

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Note: SET 1:

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SET 2:

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SET 3:

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situations

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106

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107

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education

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broad

initial

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being

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in

considered

were

indicated so indicated,

did

issues EAI on

between

Conclusions:

rank

The

of

analysis

partners (80%)

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closeness

when

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good

harmony

tests

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Amernic

and

suggest

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perceptions

of

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perceive the

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fact

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of is

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practice

pronounced

more

broadly

as

that'basis,

provide

(rank)

in

held

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of

none

the

CAs of in

a given general

110

firm

audit

in

factor in

firms in

levels ...

the firm

terms the

of

the

firm

differently

quite

hierarchy,

the

to

evidence

that

different

are

groups.

auditor

sets

independence in

for

terms

significantly

influencing

"at

auditors

size,

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of

issues.

EAI

differences.

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EAI.

two

in

non-

on

not

24]

important

an

views

refined

even

significant

(1981:

one's

is

hierarchy

is

on

level

in

these

[1987].

show

view

of

judged

are

Aranya

sets

auditors.

and

partners

showed

perception

ICAEW

sets,

used, between

views

by

four

differing

judged

when

situations

suggested

-

from

of

the

of

firm

situations,

EAI

three

and nonBig-Six

responses

significance

different

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in

as broadly

significantly

reveal

indicated

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then

by ICAEW (1987],

some

when responses

situations,

of

sets

require

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fact

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of

to

appears

contention

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perceive ...

11

this

However,

research

disregarded form,

and

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hand,

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and

differences

in

each audit

user for

situations.

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twenty

situations

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of

EA group

and

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present

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theory,

assessment.

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EA group.

both

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on EAI

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twenty

the

refined

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size

professionally

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EAI perceptions

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in

detected

chapter

group.

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perception

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manifest

persons

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comparisons,

differences

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were

not

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significant.

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the

by agency

EAI attributed in

varying

was largely

implied

firm-sizes not

theory

and ranks

confirmed

in

difference

in

ill

this

implication within

towards

stands

the

chapter.

to audit

auditors firm,

CHAPTER XII THE UNDERLYING

OF EXTERNAL

DIMENSIONALITY

AUDITOR

INDEPENDENCE

The previous of

chapter in

perception

the

firms

were

logically

This

twenty

one hand,

reasons

for

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group

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EAI),

underlying way groups

causes

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facts

process

possible

"factors"

differences

in

in

EAI

specific

scenarios?

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in it

could (for

Brunswick be that

influencing views interpret, differing

feature,

on EAI?

Thus,

phenomena views

in

differences

when

that

are

forming

we seek

to

or

112

the

terms,

6)

attributes basic

differentiating

identify

may help

on EAI.

1981:

personal

data),

biographical

example

(Libby,

Model

Lens

explain

to

(mainly)

due

distinctive

due to

"

differences?

considers

Are

they

then

that

such

(i. e.

In

other. perceptual

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models

three

and nonBig-Six

two, following)

or are

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of

on the

Big-Six

differences.

factor

External

significant

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(and the

chapter

the

and each

CMs and IAs)

EAs from

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arises

between

EAI,

identified.

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differences

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situations,

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differences

of

(BAs.

groups

user

some of

terms

on the

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identified

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chapter

contains the

considers determining

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-

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second

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the

perceptual

determines

constructs

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processing

(HIP)

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possible

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findings

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earlier the

and)

sections

particular, practice frameworks

concluding

possible as to were

of

the

likely of

to

attempts

these

results.

on to for

be concerned

it

why inter-group are 113

then

the

speculate audit grounded differences

presented.

goes

on

these

for

main

to

provide

summarises

the

four

human information

fifth

explanations

observed

each

section

implications

potential

underlying

summarises

of

and goes

of

explanations

and the

of

number

psychology,

section

explanations

(sixth

areas

(likely)

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meaningful

or

and social

findings.

suitability

for

revealed

on the

research

sets.

the

(associated

groups

the

data

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statistical

precise

assesses present

section

for

of

related

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out

finally

FA to

The third

with

spells

and

explanation

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considers

then

objectives applying

a brief

provides

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approach

(FA).

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and

first

underpinning

constructs

conceptual

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sections.

methodological

appropriate

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distinct

six

about

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profession. in

(audit)

of

factor

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the

particular,

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differences

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auditing

professions

latter's

increased

when external

The

12.1

status

accorded

them

is

profession that

its

ethics

that

ethics,

of

relevant

Providing

mind

given

users

"is

EAI

that

made to EAI. the

unearth

Such, factors ethical

relevant

that

no attempt

dimensions groups

to

sets

base

or their

the

the

above,

of

an attitude

(ICAEW,

to

attitude appears of

9]. and that

of

mind",

to

have

describe

assessments

and/or along of

it

is

been

underlying

constructs

constructs

114

1987:

do differ,

values

as "an

may help

those

with

and an objective

work"

possible

on a set

act

statements.

essentially

ethical

-

accord

audited

by integrity

professional

consequence

of

in

endorsement

EAI has been described of

to

be

characterised

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and

may not

audit

principles,

intangible

may or of

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of

ethical

expected

that

to

of

professional statements.

basis

are

an effective

approach

set

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audited

auditors

groups

ICAEW states

of

individual

are

professionally, of

declared

function.

statutory

from

users

former

approach

an important,

that

given

their

capacities by

the the

of

zethodological

their

and external

noting

services

fulfil

may arise

internal

the

the

use of

auditors

that

considered,

are

derive

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and

between

apprORriate,

Auditors

implications

audit

establish

which EAI.

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while

factors

relevant

be so.

necessarily conceptual (sets

several

researchers

Farmer,

Rittenberg

1989),

such

individual

a major fact

it

is

terms, hence

the

1985;

Lindsay, determine

to

the

EAI.

by

Knapp

underlying

unitary

assessment one

of

the

eye

EAI

is

recourse

set

sets)

concept

of

EAI;

of

as

of

the

"in

beholder

essentially to

"in

fact"

115

nature.

and external

any independence

appearance" (Barrett,

theories

perceptual

thus

auditor

perceptual

not,

may not

and

external

if

or

a personal individual

factors

of

in

the

such,

determine

to

(or

describes

independence of

is

(meta-conceptual)

be perceived

necessarily

in

of

and

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independence

However

be

1987;

not

this

characteristic

practical

differing

1981;

attempted

a distinct

independence

behavioural

lie

of

underlying

Professional

must

is

there

confirm

auditor.

only

on EAI,

objective

(constructs) to

has

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varying

empirically

Shockley,

Trumpeter,

and

may not

perceptions

addressed

of

dimensions.

or

in

been

this

reveal

their

[e. g.

influences

factors

if

has

same set

may have

will

so,

underlying

EAI

while

EAI,

of groups

and if

factors

Further,

views

Differing

moulds,

of)

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their

underlying

the

may share

groups

and 1969].

in

nature

are

in

so must In and

order.

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three

are

explain

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2.

Gestalt

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and/or based

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this

Analysis

into

In

are

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present

the

twenty

sets

are

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(different)

group

to

of

professional

manner,

perceptions

by the

116

how them

6].

those

and the

within

response

by the

FA

FA shows there factors EAII

them when developing

standards

are

indicated

of

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and

1970:

stimuli

audit

for

search is

EAI

of

sets

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determine

[Child,

if

sharing

and categorize

situations may be)

views

stimuli),

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of

to

distinguishable

rationally

be taken

13].

"stimuli"

the

this

1984:

technique

instance,

(that

to

"psychologists

sets"

questionnaire

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response

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results.

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(or stimuli

(dimensions)

different

different

indeed

used

perceive

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(Rock,

appropriate

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a stimulus

(associated)

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have

theories

appropriate

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factors

(FA).

educators people

to

varying

underlying

such

viz:

based

is

which

features"

case,

to

seek

theories

theory,

and

8-13]

empirically

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a perception

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1984:

that

theories

based

based

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theory

of

(Rock,

perception

1.

types

main

then ethical

bodies

are

underlying note

needs

and/or concerned.

Factor

12.2 In

the

(in

context

as

the

1]),

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cues

of

under

degree

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Statistical

Factor

Analysis

the

into

data

a statistical

internal

structure

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degree

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does to

not

the

factors

offer

user

of

revealed

by

judgements

so that

FA to

classify

on some

that the

logical

117

subset

together

for

have

between

a set It

variables.

them.

interpret or

a high

constituent

these

or

each

subsets

sets

identifies

explanations

the

as possible.

may exist

ready

set.

particularly

within

a correlation

data

coefficients)

binding

data

to

used

a numerical

similar

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analysing

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variables,

of

feature

inter-correlation

of

between

technique

as highly

are

a "factor".

when

variables. of

that

as

appropriate

on

15].

(factors)t

subsets

common underlying regarded

"cues".

be manifest

also

(by correlation

sorts

data

research

overview

unique

contains

the

between

1982:

is

The technique

in

Figure

association

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(Ashton,

[1966:

relevant

inter-correlation

of

12.2.1

strong

consideration

them

about

examine

decidedly

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[Brunswick,

provided

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to

situations

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data

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(HIP),

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information

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to

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independent factors

(linear)

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of

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of

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relatively

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number

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thus

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numerical

interpretation such

FA is

usage,

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offers

generated

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underlying

those

is

alia,

in

inter

used,

Some users mapping Thus (1970: used factor

of

out

FA see it

55])

as a pointer based

of

the to,

thesis

for

only

as the

first

research

and the and/or 118

In

the

usage, are

judged

hypothesised.

this

that

to

hypotheses

such

previously

view

variables

technique.

revealed

example,

a

amenable

test

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(for

large

manipulation.

to

and not

are

more

reduction

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some analysts

down into

statistical

(constructs)

with

underlying

independent

data

analysis.

correspondence

observed

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(variables)

possibility the

outside

by

unobserved

condensing

a data

mainly

of

"key"

further

and

of

variables.

of

of

of

constitute

observed

quantities

(measures),

a set

explain

which

sets

common constructs

combination

variables

of

determined

structure

underlying

attempts

members

such

Thurstone,

point

experimentation.

in

itself. - see Child

FA may legitimately

starting

FA

a purpose.

stage

in an as end

for

for,

be non-

In

other

words,

themselves but other

disciplines

12.2.2

Principal

Factor

Analysis

not

36]

points

two

types

of

is

a generic

of

underlying

the

that

out of

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analytical

on their

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from

analysis In

model

-

analytic

fact,

models

there

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is

are

factor [1970:

Child

model.

these

between

distinction

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own,

derived

constructs

term.

component

in

that

study.

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component

and

analytic

with

or areas

types

basic

interpretable

readily

be consistent

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are

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in

that

former,

the

"some account is taken of the presence of unique the variance whereas in component analysis intrusion is ignored. In a of unique variance , ** (solution) the unique variance component analysis becomes merged with the common variance to give hybrid 'common, factors containing small in but proportions not enough of unique variance, the first be worried to few important factors ... from the about the overall obtained picture analysis.,, Thus,,

the

basic

approaches of

the

rests

unit

Principal belief the

(relating

set)

present

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all

communalities

square

of

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factor

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in

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made about to the

two

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distinguishing

on assumptions

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data

analysed

feature

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portions in

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is

Analysis

(PCA)

variances

are

common,

so that

the

variances

or

the

unity.

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the

(the factor solution,

sum of loading) this

119

the

equal

on the

premised

assumption

is

not

all

made.

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theory,

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produce the

method

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data

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two model

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set

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the

important

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principal

factors

describe

adequately

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this

as being (20)

the

percentage numbers

In

for

this

of

least

variables 43

makes use of

criterion to,

and the by varying

for

factors.

rule

than

the

those

only

unity

interpretation, and at

of

1970:

accounted

variance

to

was adopted

number

attached

roots)

as

investigation.

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study.

so

(rule)

the

1952. ] This

total

of

Kaiser's

greater

reliable

thus

FA

using

extracted

under

set

is

"meaning-laden"

of

be

to

data

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in

number

criterion

(latent

eigenvalues

the

however

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reported

Kaiser's

Cattell,

referencing the

in

employed

is

the

most

apply

towards

extracting

results

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instance,

to

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issue

FA

of

helpful

are

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12.2.3

this

method

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used

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whose

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important "friendly"

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appears

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provided

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methodologies

the

and it

same factors, of

do not

approaches

average

are

factors

taken

on the amount

for

with further

basis

that

of

variance

120

eigenvalues consideration

they per

account variable.

for

important

Another rotation

the

of

initial

axis

FA reveals

the

relationship

factor(s)

and

each

"initial

matrix".

factors.

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produce

an adjusted

or

in to

easier

one way of

and main

tends the

to

initial

effects

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(on its

produces can often

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addressing

"rotated

produce

analysis matrix)

to

concern

factor

matrix".

from

factors

different

with

them usually the

Norusis

rotation,

is

so as to

own axis),

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considered

(of

each

initial

matrix,

interpret.

data

matrix

factor

of

difficult

matrix

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is

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variables.

(the

initial

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rotate

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phase

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which

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(preliminary)

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extracted. in

variables

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of

extraction

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an initial

to

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of of

examination

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essential

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states

"Rotation the goodness does not affect of of fit (initial) the factor a(n) solution. although ... factor the communalities matrix and the changes, do not percentage variance of total explained The percentage for change. of variance accounted by each of the factors does, however, change. Rotation the explained for redistributes variance the individual factors. Different rotation in the identification methods may ... result of different factors. " [Norusis, 1988a: B-54) ...

factor matrix from

analysis is

the

"direct", relevant

solution because

from

obtained it

correlation

is

obtained

matrix 121

the

initial

directly

generated.

to

By the

same token,

factor

matrix

two

The

(e. g.

orthogonal

1988a;

[Norusis, of

methods

data

relevant each

Varimax) Child, the

rotation, are

kept

results

iethods

used

commonly

most,

rotated are

obtained

direct

of

52].

1970:

[Child,

solutions"

the

from

stage

the they

"because

"derived",

are

as a second

only

made from

solutions

rotation

of

and

oblique

1970].

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underlying

are

(e. g.

Oblimin)

the

orthogonal

factor

axes

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(uncorrelated)

orthogonal

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other.

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oblique

allowed

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rotation

rotate

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of

extracted.

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linearly

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independent

dimensions

so as to

freely

clustering

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[Cattell,

the

methods,

at

along

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the

are "best"

factors to

produce

orthogonal

necessarily

Child,

1952;

arrive

axes

rotation

oblique not

factor

and Rummell

1970;

1970].

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method

has

its

By inference, the

behavioural

own advantages Child

use of

the

issues

(such

oblique

(1970: method

as EAI)

"oblique with rotation that most an admission to some are correlated factors must underlying issue The controversial in deciding the extent

60] of

and

for

rotation

when he states

that:

is behavioural variables human characteristics ... extent, and (so) the be similarly correlated. the difficulty concerns " of the correlation. 122

to

appears

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similar

unlikely

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if

even

they

need

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that

not

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oblique

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"the very

were

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reported

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analytic

1. Ascertain

how many factors

variables

contained

(i. e.

number

the

is

methodology

in of

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employed

here

to:

underlie

the

data

analysed

common factors 123

a

and Mar-Molinero application,,

Thus,

in

rotation

of

methods

each

present

uncorrelated.

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of

each

the

sections

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in

and

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separately

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was used

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are

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states

sample".

rotation

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the

of

under

rotation

12.2.4

in

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oblique of

nature

Ezzamel,

state

clustering

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B-59]

uncorrelated

are

obtained

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524]

(1988a:

influences

context,

research (1987:

Norusis

vein,

set

set

extracted).

of

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2.

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each

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3.

5.

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theoretically

0)

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0 and factor

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correlations

explained

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varies

situations pairs

variables.

124

of

1,

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(1974)

Kaiser

B-45]

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Norusis

"characterizes as measures in the 0.90's in in the the 0.80's meritorious, as marvellous, in in the 0.60's as mediocre, 0.70's as middling, the 0.50's and below 0.5 as as miserable, " unacceptable. For

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the

(and

Chapter

the

to

emerge

factors. 125

data

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"right"

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12.1

TABLE

GROUP FACTOR

SELECTED

Cases

GrOuR

No.

ANALYSIS

RESULTS

factors

of

(Eigenvalues

Cumulative-% variance

>1)

explained

EAs

118

4

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BAs

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245

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cms

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on the

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by one group may help

group

previously

explain of

126

conclusion

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from

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of

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95-96]

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1985]

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first

is

that

"integrative

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128

the

"cognitive

encompassed complexity".

immediately

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in

relevance

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12.3.1

In

Cognitive

describing

Belkaoui

cOmRlexity

the

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nature

96]

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complexity,

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129

is

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12.1

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96)

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(or

group)

"differentiation" "abstract". groups) said

to

performing

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and "integration" while,

performing

on the

other

rather

less

be "concrete". 130

handt of

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deal

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persons activities

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structures

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external

perception

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association is

a variable

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132

is

good

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note

communalities 42]

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matrices

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circumstances

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opinions

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Tables

a set

(and only

form

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set,

of

sets.

the

TABLE

12.2 FACTOR LOADINGS,

INITIAL

COMMUNALITIES

External

No.

I

Factor

Situation: idea:

Key

Auditors 3 Factor

2 Factor

Factor

Loading

Loading

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& EIGENVALUES

4

Loading

mality

79 .

01 -.

01 .

-. 21

71 .

.

22

03

-. 42

3 Accounting

66 .

01 .

18 .

-. 29

4 Ptg.

63 .

26 .

-. 09

-. 27

56 .

16 -.

67 .

-. 04

67 .

23

.

08

-. 35

12

35 -.

09 -.

48

-. 01

28

74 .

11 -.

06

.

70

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01

12 -.

55 .

-. 16

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68 .

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.

43

17

-. 07

13 -. 16

1 15

years

2 Due

to

ass.

& Staty.

5 Audit

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fee

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.

54

8 Auditor-trustee. 9 MD ex-partner 10 11

Budget

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68

pressure income

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.

. .

12

10%

13

MAS-Provision

79 .

15 -.

14

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63 .

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19 -.

15

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50

67 .

12

16

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75 .

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52

21

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20%

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fee

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(1%)

EIGENVALUES:

ex-F.

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.

. . .

09 00

68 .

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69 .

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8.81

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134

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.

.

. . . . . .

.

55

.

54

.

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.

63

.

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30

.

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.

35

.

25

.

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1.11

72

.

22

_1_V;

67

. 1

.

60 61 55 53 69 68 55 79 74 44 62 59 56

TABLE

12.3

INITIAL

FACTOR LOADINGS,

COMMUNALITIES

S EIGENVALUES

Bankers Factor

situation: Key

_1

Loadigg

Idea:

Factor

2

Loading

Factor

3

Loading

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70 .

-. 39

14 .

66 .

73 .

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06 .

80 .

79 .

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74 .

78 .

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72 .

US sub.

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64 .

fee

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70 .

88 .

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15 .

80 .

8 Auditor-trustee

78 .

07 .

.

14

62 .

9 M. D.

76 .

35 .

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66 .

32 .

04 .

53 .

53 .

09 .

78 .

89 .

79 .

25 -.

.

ii

70 .

13 MAS provision

78 .

21 -.

05 .

65 .

14 Lowballing

70 .

41 .

13 .

68

72 .

16 .

04 -.

.

65 .

35 .

13 -.

56 .

1 15 years 2 Due to

ass.

3 Accounting 4 Ptg.

& Staty.

5 Audit

of

6 Unpaid

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ex

ex-partner

10 Budget 11 Time

pressure pressure

12 10% fee

15 Inv.

client

income

trust

dir.

.

.

55

16 Largest

employer

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ex-F.

D.

74 .

21 .

30 -.

68 .

of

fees

71 .

16 .

27 -.

60 .

53 .

12

77 .

18 20% (1%) 19 Dynamic

chairman

69 .

20 Partner

brother

-70

EIGENVALUES:

.

68 .

10.88

1.76

135

1.04

TABLE

12.4 FACTOR LOADINGS,

INITIAL

situation No.

Key

1 15

Credit

Mai magers

Factor

I

Loading

Idea

76 .

years

2 Due

to

76 .

ass.

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4 Ptg.

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18 20% (1%)

-. 28

74 .

.

25

53 .

52

78 .

-. 12

63 .

69

78 .

13

63

61

74

17 -.

77 . 80 . 69 . 79

. . . . . . . . . . .

.

.

58

.

79

10 -.

56

76 .

26

51

70 .

60

74 .

.

64

.

.

57

. . .

64 64 52

15

.

31

65 .

74 .

02 -.

55

48

72 .

08

62

74 .

31 -.

.

.

. . .

52 65

83 .

.

70

81 .

24 .

71 .

exF. D.

79 .

62 .

74 .

05 .

56 .

fees

77 .

59 .

79 .

28 .

70

76 .

56

75 .

32

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chair

20 Partner

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EIGENVALUES:

81 .

68 .

71 .

employer

17 Partner

58

57

75

dir..

60 .

64 .

76

14 Lowballing

23 -.

-. 36

9 M. D.

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74 .

71 .

78

12 10% fee

56

52 .

8 Auditor-trustee.

income

ia

72 .

83 .

pressure

.

Loading

.

72 .

11 Time

Loading

66 .

fee

pressure.

nality

Factor-2

-. 30

6 Audit

10 Budget

Factor

75 .

76 .

ex-partner.

I

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Auditoi

63

US sub.

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80 .

5 Audit

due

& EIGENVALUES

COMMUNALITIES

.

61 .

11.79

-R2

11.43

136

. -

11

1,02

. . .

67 68

to

Tables

12.2

twenty

situational

first

12.4

variables

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the

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However

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between

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factor

correlation

Table

12.8,

of

(any)

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the

case

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overlap

identified

by

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between 1 and

auditors,

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by

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137

nature

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with

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2 for

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correlations.

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providing

in

that

show

also

this

auditors of

intra-group

the

clearly underlying factors.

and

TABLE-12.5 OBLIMIN

ROTATED FACTOR LOADI14GS >0,5

REFINED

RESPONSES:

Key

1 15

Factor

Factor'l

situation: No.

EXTERNAL-AUDITOR

Idea:

Loading

GROUP

2 Factor

Loading

3 Factor

Loading

Loading 59 -.

years

2 Due

to

4

-. 86

ass.

3 Accounting

-. 63

4 Ptg.

-. 67

& Staty.

5 Audit

US sub.

6 Unpaid

fee

7 Rental

-

.

77 -. 78

client

8 Auditor-trustee

.

9 MD ex-partner 10

Budget

11

Time

12

10%

13

MAS provision

14

Lowballing

15

Inv.

16

Large

17

Partner

18

20%

19

Dynamic

.

72

55

pressure pressure

.

income

fee

.

.

trust

(1%)

74

dir.

.

employer

20 Partner

55

ex-F. fees chair

.

74

D.

. . .

88

73 71

brother

138

53

57

12.6

TABLE OBLIMIN

ROTATED FACTOR LOADINGS >0,5

REFINED

RESPONSES:

Factor

situation No.

Key

1 15

to

ass.

. .

& Staty.

5 Audit

Factor

2 Factor

Loading

3

Loading

85 .

3 Accounting 4 Ptg.

I

Loading

Idea

years

2 Due

BANKER GROUP

audit

7 Rental

ex

71

80 .

US sub.

6 Unpaid

99

. fee

client

. .

69 82 58

8 Auditor-trustee 9 MD ex-partner

.

10

Budget

11

Time

12

10%

13

MAS provision

14

Lowballing

pressure

.

80 69

pressure income

fee

15 Inv. Large

17

Partner

18

20%

19

Dynamic

20

Partner's

. .

75 69 80 .

trust

16

.

dir.

58 .

employer

(1%)

ex-F.

. D.

.

fees

.

chairman

.

brother

77 70 61 93

58 .

139

81

TABLE-12.7OBLIMIN

ROTATED FACTOR LOADINGS >0.5

REFINED

RESPONSES:

Credit

No.

Key

Managers

Internal

GROUPS

Auditors I

2

Factor Loading

Loading

Loading

Idea

-AUDITOR

Factor

I

Factor

situation

MGR. & INT,

CREDIT

1 15 years

76 .

73 -.

2 Due to

76 .

-. 83

80 .

-. 83

72 .

-. 90

ass.

3 Accounting 4 Ptg.

& Staty.

74

US sub.

76 .

fee

72 .

58 -.

83

60 -.

8 Auditor-trustee

78 .

63 -.

9 MD ex-partner

76 .

56 -.

5 Audit

of

6 Unpaid

audit

7 Rental

ex

10 Budget 11 Time

client

pressure pressure

12 10% fee

income

13 MAS provision

75 .

79 .

71 .

.

61

77 .

86 .

80 .

14 Lowballing 15 Inv.

.

.

trust

.

dir.

.

69

.

50 -. 84

79

16 Largest

employer

17 Partner

ex-F.

D.

79 .

of

fees

77 .

84 .

18 20% (1%)

79 .

83 .

19 Dynamic

chairman

76 .

88 .

20 Partner

brother

78 .

61 . 140

TABLE

-

12.8

INTRA-GROUP

FACTOR

CORRELATIONS

I

Factor Auditor

Ext.

2

Factor

35

2

.

Factor

3

19 .

14 .

Factor

4

55

40 -.

Banker

Group

Factor

2

Factor

3

. .

Auditor

Factor

2

NOTE:

The

CMs,

The

as

above

only

the

tables

more

terms

defined

(no

indicate

In

variables

with

high

[Norusist

1988a:

on the fact,

the

same of

set

EAI of

a

reveal

loadings

on

Equally,

B-58].

degree

of

same factor

across

situations

Situations

1-4

only

appear

to

be

factors

across

groups.

for

groups,

the

all

12.7

group.

a limited

only

14,16,18-19

Situations

in

to

Tables

that

for

12.5

in

for

correlations

revealed

was

factors)

loadings

intra-group

factor

one

matrices

groups.

within

06

excludes

structure

or

and

61

77 -.

two

(high)

18 -.

GrOuR

pattern

simple

3

Group

Factor

Int. .

Factor

common underlying

141

and

common

6,

linked

similarly This

absence

dimensions.

and,

suggests, of

a well

Reification

12.5 To try

reification

to

12.5

12.7.

identifiably

fact

was

attempted

based

on Tables

did

prove

simple

this

may only

add

support

factors

the

that

factors

this

form

nor of

to

the

is

a unitary

or

the

to

there

in

are

constructs

an inability,

case,

reification

independence

auditor

in

Thus,

meaningful

in

assumes

identifiable

EAI.

provide

not

results

reification

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underlying

of

factors.

meaningful

attempt

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nature

conclusive

at

mapping

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totally

provide

Any

framework

understand

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revealed,

and

to derived,

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argument

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an overall

or

concept".

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as suggested

metaphysical

previously, which

concept,

be considered

reflective

(and one that

accords

on the

offerings that

of

EAI has no coherent factors

underlying

As the

credit

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manager their

that

to

conclude

issue

in

meta-constructional

or

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a general

of

mind

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EAI).

it

so,

interpretable

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group

views

basis

of

may be a

reality

speculatively

perhaps

related

with

subject

in

EAI,

of that

revealed EAI,

there

group, or

142

only

at

highly

is

one

factor a

certainly

least, concrete

sees

the

terms.

In

to

an attempt

three

their

groups,

the

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ICAEW [1987) 6:

Chapter

in

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was highly

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both

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presented

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pairs

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ICAEW-derived Factor

Ignoring (time

pressure) and banker

auditor

ICAEW-derived

their

in

situations

internal

two

in

(conflict).

commonality. one situation

with

loaded

with

only

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compared

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merge

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as modified

highly

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of

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showed

paradigm

and Involvement

pattern

bankers,

groups

These

a comparison rotated

were

Guidelines,

Pressure,

framework, for

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for

revealed matrices

pattern

181-182.

Relationship,

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factors

reify

constructs

identified. these

between

two

groups.

An even more confused auditor

group,

where

to

be spilt

across

to

conclude

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were

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results

test

of

one closely

categorisations

of

As such,

our

we are

the

forced

ICAEW Ethical

results

empirical

on them),

EAI were 143

appears

theoretical

alternative based

external

be demonstrated.

cannot

whether

the

construct

between

concordance

more supportive

paradigms seven

to

involvement

factors.

two

and our

an attempt

pattern the

for

emerges

also

the

following

considered:

3

1.

Adams

Committee

2.

Cohen

Commission

3.

ICAO

(1981]

4.

ICAA

(1984]

5.

Farmer

6.

Lemaignan

7.

Lindsay

et

[CICA, [CAR,

[1987]

al

[1987]

in

results

EAI

theoretical

Wysocki

any

in

independent

of

hypothesised

someone

EAI

constructs

of

neutrality

(between

is

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influences interests cause

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impartiality

to

EAI

at

one Thus,

(on

argues

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two

least be

to

has

may be

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(underlying

main

can

free

either

place

of

issues)

and

persons).

be

of-others

for

something.

and from,

cause (clients

his

him

to third

own personal

obligations.

144

be

the

Accordingly,

neutral.

or

or

if

be present

only

impartial

must

[1981a]

existence-of

two

basis,

auditor

Sinning

and

the

totally

sets

vice-versa).

the

or

for

support

alternative

influence,

of

that

auditor

above (or

implies

sources

above

the

significant

Dykxhoorn

independence

On the

of

constructs

[1972]

or

was there

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our

parties

1978]

[1989]

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1978]

able

to

identify parties), interests

withstand, the

with or above

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following

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factors

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12.6

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to

"pro-other"

either

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of

demonstrably

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also

or

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supportive

of

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of

remarks a number

Sharaf,

1961;

Carmichael

1969)

Dykxhoorn

and

between

other

of

and

"in

EAI

make EAI

and

the

point,

an

and Barrett,

1968;

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fact"

this

(Mautz

authors

(1981a]

Sinning

Expressing

appearance".

in

evidence

corresponding

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to

with

distinction

our

genesis

threats

results

our

in

constructs

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important

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argue

authors

that: in independence "Since the concept appearance of is concerned perceptions of with the collective including the users of financial statements, covering rules auditors, specific any ... in appearance independence should be auditors' based on such perceptions. Determining what those first towards be the step perceptions are should auditor) a solution of the (professional independence 11 Sinning, (Dykxhoorn and problem ... 1981a: 181]. Further, (revised) real

it

is rules

for

consequence,

knowledge

of

truism

a virtual

what

the only the

auditing if

independence

are,

parties

and groups.

Using

to

obtain

such

any set

are (if

developed any)

as perceived a FA approach, relevant 145

of be of

will

profession

they

factors

auditor

attempted

that

in

the

underlying by interested this

perceptions.

chapter

following

Thus, of

two main

factors

Wysocki,

their

"pro-auditor" results

our

to

also

not

are

classification

12.6

Concluding

"pro-other"

either

impairment

However,

EAI.

of

demonstrably

or

supportive

of

remarks a number

Sharaf,

1961;

Carmichael

1969)

Dykxhoorn

and

between

other

of

and

this

an

make EAI

and

the

point,

and Barrett,

1968;

swieringa,

fact"

"in

EAI

(Mautz

authors

(1981a]

Sinning

Expressing

appearance".

to

EAI.

of

with

distinction

in

evidence

corresponding

results

our

genesis

threats

this

Together

in

constructs

having

hypothesise

we would

important

"in

argue

authors

that: in independence "Since the concept appearance of is concerned of perceptions with the collective including the users of financial statements, covering rules auditors, specific any ... be in independence should appearance auditors' Determining based on such perceptions. what those towards first the be step perceptions are should auditor) a solution of the (professional independence Sinning, 11 [Dykxhoorn and problem ... 1981a: 181]. Further, (revised) real

it

is rules

for

consequence,

knowledge

of

truism

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auditing if

independence

are,

parties

and groups.

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to

obtain

such

any set

are (if

developed any)

as perceived a FA approach, relevant 145

of be of

will

profession

they

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auditor

attempted

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in

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underlying by interested this

perceptions.

chapter

our

empirical

perceived

results

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chapter

against

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complete

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users

of

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audit

results,

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research most

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cognitively

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factor groups.

paradigms none is

issued

with

audit

and

and

other

complex

overt This

groups. issuers such

and issues.

by our

FA

and underlying

revealed

- with

146

user

any

confirmed

number

SO.

of

supportive

without

between

not

were

in

meta-concept.

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on EAI

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to

pronouncements

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research

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of

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chapter

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factors the

are

across

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each

of

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on EAI and CMs least

findings

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for

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given

external

auditors

the

behalf

audit

clients,

two groups

factor

caution

is

being

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(1986]

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independence

in

degree

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department) even

reliance

on

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(for

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of

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taken

to

are

it

external place

"employees

be

that

IAs

be independent whereas

the

of

therefore

recognises

of

external

a difference

"independent" 147

auditor

and cannot

so,

whom they

that

states

work.

work)

- and thereby

it

of

internal

the

their

doing

"Reliance

entitled

assessed

that

recognises

independent cannot,

should

of

make such

when of

due

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the

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order

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if

independence"

of

auditor

one may question

recognises such

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in

on

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in

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being

reliance

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ICAEW

give

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in

to

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feature,

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Chambers

47)

[1981a:

states: internal to*a. it is recognised that audit needs is in ependence from management, but this independence interpreted currently as meaning from the management of a particular audit area, is independence (as than from rather management the case with external for whom thb auditors) is currently " being provided. service However,

likelihood

on EAI between

structures this

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to

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to

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hallmark

of

between

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groups, to

profession

and/or

audited of

this

a monotonic

148

in

is

of why

EAs is to

a

the EAI

particular statements

Findings

relationship and its

complexity

of

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it

closeness

(audit-immediacy), of

more abstract

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are

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of

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banker

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significant

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(1979),

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of

in

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Both

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within

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to

the

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to

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while immediacy"

as a content

interesting

149

service

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and "audit

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product

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extent

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would

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of

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and there

is

being

then

for

150

to

examined.

reveals

sets

EAI as seen by audit-user EAI guidelines

cognitive according

respective need

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auditingr

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dimension

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1991:

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of

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accountants

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Kingdom.

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to

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in

1992.

last

week

of

from

both

closing

date

October

1991,

ethics"

was

auditors for

planned

151

such

and

comments

-and a revised for

users

release

of was

"guide early

The

next

chapter

perception but view.

data group

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Lens nature

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chapter

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in

a factor (or

presented

in

of

individual

to

assess

152

basis,

structure

discriminating)

(Brunswick,

perceptions

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EAI,

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considers

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1952],

so that

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explain EAI.

of

within inter-

the based the

of

CHAPTER

XIII

THE MAIN

GROUP DISTINGUISHING

AUDITOR

INDEPENDENCE

Chapter

10 identified

number

of

users with

concerned differences by

seen

of

audit

of

Chapter

view

in

draws

on the

examine

why

such

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TABLE

13.1 MODEL

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are at

significance of

applications.

rate

suggested

covariance Overall, with

74.5%

auditors

given

0000 . at

.

per

0802,

matrices the of being

model's nonBig-

-

Four

the

of

conjointly

twenty with

discriminant

With

(@

respective

one

had

situations

differences

were

other,

sense.

four

all

each

05). .

when

situations,

audit

in

significant

total

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12), t-test

group

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situations in

M-W contributions

percentage

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significant

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assessed

brackets)

are: Sitn.

11 - Time

Sitn.

15

Sitn. Sitn.

trust

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Lowballing:

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quantum Analysis

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situation,

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registered in

power

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model EAs

Big-Six

EAI

mean) with

nonBig-Six

their

stringent

in

order

in

the

auditors

it see

who

time

to

under adhere

figure

more their

schedule,

to such

to

181

EAI as

to

the

strongly

nonBig-Six

reasonable

threat

frequent

required

reporting

than

may be less

work

timely

and

portfolio

Thus,

a stringent

to

companies

client

EAs will

likely

pressure

quoted

colleagues. Big-Six

pressure)

means shows that

group

EAs may be more

intense

within

time

mean) were.

Big-Six

for

(13.4%)

discriminatory

whereas

(negative

(20.5%)

Reliance

Involvement

of

(26.7%)

Involvement

income:

of

(39.3%).

and

director:

11 (significant

highest

(39.3%)

Pressure

pressure:

in

expect

in

the

Situation

that confines 11.

13.5

TABLE

DISCRIMINANT AUDITOR

MODEL

5:

V.

nonBIG-SIX

EXTERNAL

BIG-SIX

GROUP

Model 96 .

-

83(SITN

11)

44(SITN .

15)

.

Model-related

500 -. -1.320 -. 860 -. 460

classification ACtual

Group

within

sitn. 11

191

. -1.794 -. 426 -1.353

.

M-W I

P to remove

39.3 20: 6 13.4 26.7

15.6 8.7 5.1 8.6

in Entgy SteR 1 3 4 2

MDA variables)

correlation

groups

12

14

is

1.00 42 . 36 .

1.00 27 .

1.00

1.00

40 . 33 . 24 . lambda

= 0.734

with

at

0000 with .

Box's

M statistic

= 17.41,

1.67,,

significant

at

significant

degrees

14)

45(SITN

Group Membershiv Predicted Auditor Big-SiX Auditor nonBig-SiX 25.5% 74.5% 75.4% 24.6% classified cases correctly

11

12 14 is

Wilks'

-

matrix

Auditor nonBig-Six Big-Six Auditor 77.0% of "grouped" Pooled

12)

statistics

11 12 14 15

2.

.

63(SITN

GrOuR Means Big-SiX nonBig-SiX

sitn.

1.

+

of

0802 .

freedom. 182

= 35.24p

chi-square

4 degrees

of

freedom.

F-statistic

with

app.

with

10 and

52,441

of

on the Six

hand,

other

auditors

they

to

(For of

of

an analysis

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in

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top

100

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in

Lea

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its

recent

- May 30,,

main

Age:

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aspect

ethical

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audit

(and other)

while

some nonBig-Six

it

possible

to

prohibitions

in

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indirect

staff

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related

less

severe

audit

internal

have

than 183

those

which PLC.

client.

rules,

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their hand,

regulations,

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monitoring

audit

regulations

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and clients. firms

the

audit

involvements

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shares

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trust

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with

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and professional

enforce

which

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set

UK,

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13,1991:

relates

to

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see

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an investment

level

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firms

in

audit

in

an auditor

procedures

with

concern

analysis

1991:

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for

of

is

this

1976.

circumstances

involvement

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if

EAI

Dov Fried,

- June

material"

addition

to

and

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see

a director

a "not

time

tight

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Accountancy

responsible

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then

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US,

achievement"

concurrently

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of

15 describes

partner

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some jeopardy

clients

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recipe

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articles

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11 may be rationalised.

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CPA firms

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less

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clients from

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firms

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a greater

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any

how tenuous)

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one might

audit auditors

from

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firms.

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and nonBig-Six

external

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EAI,

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much more

(about

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EAs.

Situation

12,

10% of for

his

20.6%

testing

(Table

11.5) differently

the

compared

5% level

at-the means

shows

(t

than

concerned

due

to

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fact

the firm of

EAs to

is

that

it

with

for

reliance

client,

accounts Univariate

power. EAs to

be not EAI

with

concerned

in

colleagues

nonBig-Six

However,

comparison

be

a third

about

than

of

group

more

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nonBig-Six

We may hypothesise 0

their

to

= 1.8).

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listed

more

with

= -2.85)

an auditor's

Big-Six

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concerned

discriminant

shows

significantly situation

are

concerned

only

model's

both

(t-value

times)

his

from

by an analysis

while

significantly

describes

which

the

of

that

auditors

three

fees

be confirmed

indicates

means which

group

to

appear

increased

such

that

the

more

likely

client to

clients.

184

and be

concern fee

spread

portfolio over

might in a greater

be a

In

the

case

of

that

possible

one

disproportionate

they

are

generally

nonBig-Six

(fee)

client

last

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significant

describes

the

creates the

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audit

both

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group

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affairs

it

on,

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manifest

between

of

which

involvement

of

EA groups

is

the

EA

or

his

together

client, pressure

source

EAs from

by,

of

Big-Six

= 2.24).

EA in

with

the

the

nonBig-Six

financial

exertion are

auditor,

discriminating

185

of

reflective

the

on the

and

as their

different

situations

involvement

However

as concerned

(t

with

and concern

significantly concern

registering

manifest.

be twice

that

appears

time

significant

to

with

levels

of

12.

(13.4%),

14

discomfort

situations

colleagues

summary,

reliance

their

means,

EAs appear

(univariate)

In

the

situation

and nonBig-Six

lowballing

nonBig-Six

in

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financial

for

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of

lowballing

such

cause

firms

which

with

client.

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negative

as much

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variable,

(indirect)

an

be one

relationship

classic

base,

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as EAs from

dependency

a

fee

and

to

have

may not

EAI

with

client

likely

more

accustomed.

auditors

concern

in

12 is

is

may form

clients

the

of

element

so Situation

and

large

two

or

it

however,

firm

a nonBig-Six

EAI

among

views

auditing

of

-

the as

firms.

The

variation

EAs

from

the

two

in Big-Six

of

If

audit

UK audit

so,

(Kelman,

acculturation two

groups

which

of

be treated

must

consistent being

in

this

as

only

it

as

[1979:

of

some

work

at

like

these

within

results,

in

the

be

seen

findings he

wherein

of

may be

to

above

form

our

profession

186]

indicative

firm-size.

preliminary,

the

a less

of

generally,

would

respect,

Pearson

of

More

auditing

as homogenous

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the

with

being

1972)

imply

perhaps

basis

in

operate

may

indicative

firms.

audit

the

on

may be weakly

this

this

that

suggest

and

profession,

split

cultures

turn,

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sub-cultures.

may

possess

auditors

of

homogenous

firms

between

EAI

on

perceptions

nonBig-Six

and

categories

differing than

underlying

UK not to

be.

parallel

states:

"It in any future should be noted that research that CPAs as subjects, project utilizes the that be to researchers recognize wise should CPA population cannot always be viewed as one homogenous group. Eight Big As demonstrated ... CPAsl perceptions (on EAI) are sometimes different " from nonBig-Eight CPAsl perceptions. Thus, of

while

between

view

issues

there

(e. g.

external involvement

be a reasonable

Big-Six

and nonBig-Six

some specific

personal

there

appears

relationships), differences

to

appears

of

views

auditor in/with

also in

terms

independence clients'

of

EAS for

some EAI

auditor-auditee to

be significant

other

(e. g. affairs

186

closeness

aspects

time

of

pressure,

and fee

reliance).

13.3.6

linear

This

discriminant

developed

from

randomly

selected

two

closer

data. the

version,

provide

a measure

Consequent

to

= . 000.

However,

their

Having

regard

coefficients, contributed Situation

of

to

Table

to

12 contributes

in

order

at

LDA functions than

better

to

according

under this

of

first

much to 187

Box's

50% of

compares

classification

alpha of

equality

of

of

M.

cases with

a

25%.

standardised

shows that

the

to

functions.

two

both

However,

13.6

of

the

just

magnitude

these

version

hypothesis

correct

relevant

main

made by each

method,

classifies group.

heavily

each, of

rejected

was

the

for

unstandardised

contribution

null

chance

were

13.6

significant

the

to

the

Table

selection

correctly

probability

in

highly

original

to

(rotated)

the

of

matrices

The model

80

made up of

the

provides

addition

stated

the

were

covariance

13.6

variable

identified

to

In

are

discriminant

being

four

the

of

and have been retained

standardised

functions

was

each

functions

possible

Table

analysis.

statistical

two

three

significant,

statistically

IAS

cases.

the

of

from

group

sample

CMS. V.

application

responses

each

groups,

only

analysis

sampled

research

BAS V.

EAs V.

Discriminating

function, the

3 and 11

Situations

second

while function.

highlights

The model distinguishing the

within those

three

importance,

group four

embodied

the

three

3-

Situation

2.

Situation

11

-

Time

3.

Situation

12

-

10% fee

Consideration 13.6

shows

increased three

two

external

User

auditor)

Issuer

opposite

(an

independence the

User,

group.

by

3 refers

provision

of

personal off

to

for

responses

with

group

11)

with by

all

(external

the

12 showed

the

auditor

external

when

Table

concern

Situation

the

to

compared

all

three in

a positive

economic

(financial)

are

auditors along

shows that

User this

Analysis

services.

external

register

external

audit

situation

group

but

mean.

lines.

expected 188

situation,

only

of

were

independence they

being

implications by the

not

auditor

groups)

situation,

concurrent

auditor's

external

and

about

assurance to

(3 and

However, concern

in

means

independence

Issuer

the

EAs more confident icompared to the

group

group

to

accounting

means for

derived

(Reliance)

groups).

Situation

group

the

(Involvement)

compared

increased

are

(Pressure)

situations

when

views

below:

noted

services

reliance

auditor

groups

aspects

situations

pressure

these

of

These

individual

the

of

when comparing

/audit

Acctg.

1.

be of

EAI to

of

groups.

research in

aspects

even the

Given

only the

triggered such

TABLE

13.6 6:

DISCRIMINANT

MODEL

Discriminant

function

BA v.

EA v.

Function

. -. -. -.

GROUP

coefficients

Unstandardised 1 Function Function SITN 3 11 SITN 12 SITN CONSTANT

IA

CM v.

_2

Standardised Function

-. 18 86 . -. 44 17 .

91 10 55 28

and rotated 1 Function 2

1.15 65 -. -. 13

-. 22 52 -. 1.12

statistics I 65 . 129.42 0000 . 9

Function

Function lambda Wilks' Chi-square Significance Degrees of freedom GrouR Sitn. Sitn. Sitn.

Means 3 11 12

EAs 14 . 22 -.

(Accntg. services) (Time pressure) income) (10% fee

Classification Actual

-1.49

Predicted

GrOuR

EAs BAs cms IAs

Pooled

64.6% 24.3% 16.7% 15.0% of

"grouped"

within

sitn. 3 11 12

Overall Box's M Rao's F Degrees

CMS -. 70

BAs -. 12

-1.43 -1.25

-1.01 -1.08

IAs -1.37 -1.05 -1-01

matrix EAs

48.6%

2 91 . 29.08 0000 . 4

groups

cases

GrOuR MembershiR

BAS

cms

17.7% 29.7% 19.2% 6.3%

6.3% 31.1% 38.5% 18.8%

correctly

correlation

3

11

1.00 42 . 48 .

1.00 40 .

classified

matrix 12

1.00

a

statistics statistic: app.: of freedom:

38.86 (sig. @ 0037) . 2.12 18 and 318466 189

ý

IAS

11.4% 14.9% 25.6% 60.0%

If

it

is

that

the

even

(issuers

financial more

to

we have

20]),

statements

(less

suggest

than

the

both

issuers

are

concerned

basis,

on this

so).

to

evidence

dependency

by ICAEW (1987:

audited

wish

then

a 10% fee

at

suggested of

former,

and users

UK audit

EAI

with

bodies

the

suggested

concern

displayed

with

EAI

in

discomfort

with

the

fact

reconsider

15%

15% maximum

may

fee

dependency.

If

however,

12 is the

the

an expression in

client

of

is

question

auditor,

then

consider

some stratification

performing

audits

stringent

In

UK audit

of

client's

it

affairs,

and exertion

on him are

the

possibly

discriminating

views

are

with

associated

13.4

Summagy

Following chapter

or

on

in (use

conclusions from

the

hypothesised

be differently

affected,

of

most the

and

the each

191

a

the

pressure

source all

of

EAI

of

whom

accounts.

audited

implications

Brunswick that

of

EA in

time

major

groups,

issue)

or

more

by the

manifest four

firms

reflective

involvement

on,

to

criteria.

situations

reliance

the

of

that

such fulfil

financial

that

appears

it,

companies

and

one

that

may wish

profession

listed

of

listed

only

within

professional

summary

level

the

the

Situation

(1952] four by

Lens

research varying

EAI

model,

this

groups

may

stimuli.

To an extent

the

individual

that

on group

cognitive

in

Thus,,

an EAI

contained modelling

techniques,

identify

the

the

all,

LDA models

were

of

2-group

between

or

to

their

clients

discriminant

such

personal

EAI

suggests

that,

situations

in

differing

enough

staff)

did

as

such,

to

views

in

among

general,

much the warrant

rise

of

each

to

the

With

IAs),

CMs v.

EAI

contrasted

between not

all-

views

the

the

presence

situations and

auditors

possess

strong

less

helpful

may be four

groups.

four

same way,

192

that

showed

relationships

and,

give

power

developed

(client

to:

groups.

research

models

power

distinguishing

This

the

the

general,

relating

and

LDA

andl

BAs V.

v.

applications, within

groups

developed.

were

6 (EAs

Model

stimuli using

that

discriminant

(situation).

exception

In

between

different

the

attempted

chapter (situations)

stimuli

stimulus

six

in

situations),

this

percepts

assess

In

be

to

same stimuli

embodied

questionnaire

the

differing

(as

context

in

2.

based

alia),

differently.

viewed

1.

the

possibility

(inter

processes

may provoke

origin

the

may reflect

preceding

at in

groups least

see not

a LDA model.

in

The

only

distinguishing

EAI

exception

the

User

other have

case

dominant,

dynamic

in

situation

19.

the

situations

on the

pressure

him

(Situations

client (direct affairs

or

indirect)

of

the

important

in

by

determining

of 10 and from

one

and

an involvement

auditor

in

the

14 and

15)

or

with

(Situations

client

types

income

fee

of

18)

the

degrees

(Situations

on a level

type

characterised

of

auditor

12 and

the

varying

reflective

external

by

reliance

(to

to

with as

the

with

likely

interface

that

This

cognitive

less

chairman

show

BAs.

compared

probably of

LDA model

richer

when

company

the

EAs and

relatively

bankers,

of

did

models

models),

11),

the

experience

of

However

between

views

in

was

above

who were

groups,

significant

within

the

may reflect in

domain

to

exception

2,31

were

views

group-differentiating

on

EAI.

Given

recent

users

of

by

Age,

audit

Davies,

"Private

discontent

the

(then]

the

twenty

are

manifest,

as

(see

for

example,

Audit

31,1991:

then EAI

audit

was

the that

EAs would than

users

remarks

general

some made

Controller, - Accountancy

call"

where

in

expectation group

differences

be more

content

with

their

(audit)

services.

of

193

by

expressed

Commission

2),

situations

of

EAI

independence

sector

October

approving

services

with

or

two

With

Big-Six/nonBig-Six

showed EAI

be along

to

to

related from

(Situations

exceptions

In

a client.

concerned

(higher

As group

differences

identified

expected

lines,

tend

451)

findings

financial than

statements

disregarding

EAs.

generally Firth's

results

indicated

that

were

much more

along (1980: "users

of EAIII

of

sceptical

of

the

a more relaxed

Additionally,

audit

further

time

pressure

14) were

- Situation

auditors

auditing

contexts

from

the

means)

that

Big-Six

firms.

194

to

EAI

in

models

six

EAs have the

audit

differences

group of

- Situation

seen to

billings),

groups.

user

noteworthy the

within

completion

external

the

Top Ten firm

in

identified

and approach

of

of

national

group

(12 and

situations

office

1% of

(analysing

view

than

(especially

but

local

LDA situations

showed

situations

two preceding

18 (provincial

20% of

developed

six

more

nonBig-Six

support

the

and Situation

generating each

to

fees

of

EA themselves.

Thus, 15)

whose

were

of

12

EAs were

than

means)

negative

they

Big-Six

cases,

results

on views

on a 10% level

reliance these

the

Situation

expectations.

EA's

15).

differences

group

prior

the

12 and

audit

significant 11,

be manifest and those

and lowballing between from

nonBig-

EAs from their

nonBig-Six

precise

more

be, in

[1981a:

95]

Big-Six

a lowballing so is

open to

auditors

the

with

agreement

views

of

appear DeAngelo

that:

she states

when

is

why this

However

eng uiry.

than

concerned

EAI in

with

precisely

general

less

appeared

colleagues

As to

situation.

to

firms

Big-Six

is a response to an underlying "low-balling interest; lowwhich economic creates parameter is not the cause of impaired balling auditor independence. In fact, would suggest observation of low-balling in the market is some competition for that there is a competitive (it) audit services, since to the existence response potential of future that Our analysis profits. regulations suggests (or suggestions by the Cohen commission) which to deal the issue attempt of auditor with independence the treat low-balling by curtailing symptom not the cause. "

DeAngelo's agency

theoretical

theoretic

equilibrium

lowballing

does

The rationale the

fact

impact

on either It

is

the the to

will

in

the

As such,

occur).

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external

were

and

(App.

may justly

statements

between

response

questionnaire be the

each

situations,

(in

as the

sets

filter"

to the

of confidence

(0 = NONE through

scale

alongside

the

and

as a "personal

the

considered:

by each respondent

This

obtained in

question do you

of

a value

(MLC)

responses

degree

MLC variable

are

(MCRR)

Response

research.

(raw)

the underlying

(MLC),

in developing

role

actual

auditors

were

as registered

MLC acted

respondent's

FIRMSIZE

ones

variables

of Confidence

in this

analysed

nonBig-Six

Refined

a crucial

firm

those

with

dummy variable

Confidence

of

The MLC variable,

auditors

variables

dependent

Two continuous

The

1 and

of

firm

compared

Big-Six

analysis.

a value

large

when

the

large,

as

that

on EAI

views

submitted

assigned

hypothesis

the

on a 7-

provided

0.

The MLC question each

respondent's to

attitude

EAI.

determinants

If

and

consistency, situations

the

"Mean

the

computed

the

as

MCRR = AR - MLC) as

in

it

addition

expression

to

Table

provides,

that

of the

mean

of

Response) respondent's

each

14.1

and

Refined

Composite

is

and was

in

used

judged

each

some basic

selected

standard

deviations)

their

individual

sets

descriptive

of

the

of

the

to

the

dependent

variables.

211

e.

AR alone,

personal

four

(mean values and

norms.

research

statistics for

MLC (i.

MCRR gave

individual

recognised

for

AR and

preference

that

(MCRR)

Response"

between

difference

groups,

to

range

Average of

essence

overall

of

questionnaire

(11AR11or

-

measure

on EAI.

However, is

twenty

to

replied

a good

we may consider

responses

"captures" views

issues,

EAI

twenty

all

respondents

a representative

constitute

important

(MCRR)

with

the

that

personal

on EAI.

views

individual

situations

questionnaire

against

the

of

and

of

base

an excellent

Response

that

capture

view

importance

possible

Refined

we postulate

the

is

each respondents'

of

Mean ComDosite

it

Thus, the

to

an attempt

and underlying

overall

judge

to

which

in

was asked

and

attached independent

TABLE

14.1

DEPENDENT AND INDEPENDENT VARIABLES

Groups

n

SUMMARY STATISTICS

,

EAS

BAs

cms

XAS

117

76

205

230

Mean

SD

Mean

Mean

SD

SD

Mean

SD

Variables:

Dependent MLC

4.27

77 .

4.01

93 .

3.88

90 .

MCRR

-. 31

78 .

33 -.

82 .

-. 71 1.01

3.99

-. 73 1.05

Indel? endent 59

41 .

45 .

66 .

57

46 .

34 .

45 .

UNDEGREE

76 .

72 .

35 .

74 .

KNOWLEDG

72 .

49 .

02 .

39 .

ACTIVITY

84 .

88 .

61 .

.

76

NA

86 .

58 .

23 .

AGEYEARS EXPERIEN

FREQUENT

. .

25% of

EA respondents

were

partners

57% of

EA respondents

were

from

212

in

Big-Six

audit audit

90 .

firms. firms.

TABLE

14.2

CORRELATIONS: MULTIPLE

AND INDEPENDENT

DEPENDENT

FOR EXTERNAL

REGRESSION

AGE

EXP

UND

-. 09

-. 00

-. 01

08 .

07

-. 08

VARIABLES

AUDITOR

GROUP

ACT

RAN

-. 08

-. 06

-. 05

33 .

07

25

16

-. 02

]KNO

FIR

Devendent MLC MCRR lndeý

.

.

.

.

endent

AGE

1.00

EXP

.

UND

83

1.00 1.00

-. 40

42 -.

32 .

34 .

-. 14

ACT

-. 07

01 .

-. 13

.

RAN

49 .

50 .

47 -.

27 .

-. 03

06 -.

09 .

04 .

01 .

20 .

]KNO

FIR

1.00 15

1.00 1.00 02 -.

1.00

KEY TO VARIABLES AGE

Respondent's

EXP

Years

UND

Possession

of

age

in

bands

professional of

of

experience

(EXPERIEN) (UNDEGREE)

degree

a university issuing

(AGEYEARS)

years

KNO

='Knowledge

ACT,

= Area

of

main

professional

RAN

= Rank

in

firm

(partner/non-partner)(RANKFIRM)

FIR

= Size

of

firm

(Big-Six/nonBig-Six)

MLC

= minimum

MCRR = Mean

of

Level

Composite

of

audit

213

(ACTIVITY)

activity

Confidence

Refined

(KNOWLEDG)

opinions

(FIRMSIZE) (MLC)

Response

(MCRR)

Tables

to

14.2

the

Pearsonian

set

of

the

The

14.3.1 To

sets

regression

the in

the

1.

MLC

=

group

role

of

following

MCRR =

78 + -.

higher

at

other

suggesting

and that

variables

EA

run:

KNOWLEDG,

ACTIVITY,

KNOWLEDG, ACTIVITY,

in

brackets)

resulted:

Adj.

R-squared

= 0.10

(ACTIVITY)

Adj.

'R-squared

= 0.06

(2.81)

(corroborating

4.49

were

the

(FIRMSIZE)

variable

in

auditors

from

MLCs when compared

firms

for

attitudes

(t-values

54 .

significant

FIRMSIZE,

firm

and

(3.74)

(-4.38)

The only

models

FIRMSIZE)

51 .

+

(38.41) 2.

EAI

EXPERIEN,

models 3.98

further

FIRMSIZE)

RANKFIRM,

=

regression

EXPERIENt

MCRR = f(AGEYEARS,

MLC

and

each

variables.

regressions

f(AGEYEARS,

The following

variables,

personal

explaining

RANKFIRM, 2.

between

models auditor

determinants

basis),

an a group

correlations

independent

of

investigate

(on

independent

and

External

group,

summarise

product-moment

dependent

within

14.3

14.5

the of

with

first

auditors

of

RANKFIRM were 214

firms

at

demand

nonBig-Six

Big-Six

auditors

is

equation

Big-SiX

mean MLC for

nonBig-Six

including

the

auditors 4.02).

significant.

No

The

second

equation

auditing" those

In

external

other

those of

in

outlined

their

regression

in

involved

directly

the

those

auditors

This

is

accordance

less

which

showed

between

immediacy

to

14.3.2, Table

cognitive

Banker 14.3

Pearsonian

grOuR

and

The following

this

of

correspondence and to

attitudes

banker

EAI.

the

group,

correlations

dependent

independent-variable

MLC

the

auditing.

models

regression for

presents

findings

and

confident

in

environment

complexity

as

independently

positive

audit

product-moment

independent

1.

a direct

the

situations

involved

previous

auditors

more

acting

directly

with

research,

associated

are

colleagues

than

in

making

questionnaire,

professional

than

lower

that

suggests

decision

such

"non-

MCRR for

auditors.

external

this

words,

the

was consistently

auditors

"auditing"

of

that

suggests

variables

and

between

the

within

the

set.

two

regression

= f(AGEYEARSj

equations

are

run: ý

EXPERIEN,

KNOWLEDG, ACTIVITY,

EXPERIEN,

KNOWLEDG, ACTIVITYr

FREQUENT) 2.

MCRR = f(AGEYEARSj FREQUENT)

215

TABLE

14.3

CORRELATIONS MULTIPLE

AND INDEPENDENT

DEPENDENT

FOR BANKER

REGRESSION

VARIABLES

GROUP

AGE

EXP

UND

KNO

ACT

PRE

-. 10

-. 16

-. 18

07 .

18 .

09 .

04 .

11 .

04

-. 06

-. 10

-. 03

Dependent MLC MCRR

.

Independent AGE

1.00

Exp

79 .

1.00

UND

-. 21

-. 08

KNO

42 .

42

28 -.

ACT

-. 03

01

05 .

.

PRE

19 .

16

08 .

25 .

. . .

1.00 1.00 19

1.00 31 .

1.00

KEY TO VARIABLES AGE

= Respondent's

EXP

= Years

UND

= Possession

KNO

= Knowledge

ACT

= Area

of

main

PRE

= Frequency

of

use

MLC

= Minimum

Level

of

MCRR = mean

of

age

in

bands

professional of of

Composite

of

experience

audit

professional of

Confidence

216

(UNDEGREE) (KNOWLEDG)

opinions

(ACTIVITY)

activity

audited

Refined

(EXPERIEN)

degree

a university issuing

(AGEYEARS)

years

accounts (MLC)

Response

(MCRR)

(FREQUENT)

in

However,

both

statistically

no evidence

driving

views

14.4

and

independent

variable

the

credit

equation, is

significant 3.77

albeit

+

27 .

the

would

that

in

the

below with

weak

equation

independence

do their

colleagues

of

have

recourse

to

financial

levels

of

which

they

Adj.

regression are

run

MLC regression in

brackets), power: = 0.02

R-squared

(somewhat

audited

the

On that

basis,,

suggest

some direct

there

levels of

financial

217

of

external

same calling statements is-(weak) association

MLC demanded by CMs, and the use audited

it

roughly),

who use audited

demand higher

than

to

the

explanatory

managers

credit

professional

evidence

within

(t-values

(FREQUENT)

above

more often,

frequently.

the

group,

the

Only

the

group,

(2.09)

Interpreting

accounts

banker

the

respondents.

between and

same two

group.

stated

-

(38.18)

appear

for

run

is

manager

variables The

basis

models

correlations

set.

manager

which

MLC

regression credit

a

systematically

banker

by our

the

dependent

as those

equations for

for

product-moment

independent

features

personal

manager-grOuR presents

Pearsonian

of

develop

to

possible

and so-, on this

model

on EAI as held

Credit

Table

was not

significant

we have

14.3.3

it

cases

confidence auditors, who do not as

empirical between

frequency

statements.

with

the

TABLE

14 *4 DEPENDENT S INDEPENDENT-VARIABLES

CORRELATIONS: MULTIPLE

REGRESSION FOR--CREDIT-MANAGER

GROUP

AGE

EXP

UND

KNO

ACT

PRE

03 .

03 .

03 -.

03 -.

08 -.

15 .

-. 03

03

-. 07

03

09 .

-. 11

Dependent MLC XCRR

.

.

Ind8Rendent AGE

1.00

Exp

48 .

1.00

UND

-. 02

02 .

KNO

09 .

20

05 .

ACT

-. 17

17 -.

-. 22

03 -.

PRE

-. 02

21 .

02 -.

12 .

.

1.00 1.00 1.00 05 .

1.00

KEY TO--VARIABLES AGE

= Respondent's

EXP

= Years

UND

= Possession

KNO

= Knowledge

ACT

= Area

of

main

PRE

= Frequency

of

use

MLC

= minimum

Level

of

XCRR = Mean

of

age

in

bands

professional of of

Composite

of

experience

audit

professional of

Confidence

218

(UNDEGREE) (KNOWLEDG)

opinions

(ACTIVITY)

activity

audited

Refined

(EXPERIEN)

degree

a university issuing

(AGEYEARS)

years

accounts (MLC)

Response

(KCRR)

(FREQUENT)

14e'3.4

Internal

Table

14.5,

variable for

the

BA and

low

but

statistically

The

equations

CM groups

developed

3.87

(-

+

(-3.34)

equation

knowledge

in

main other

IAs

Both

as

models

models

revealed

explanatory

power.

(KNOWLEDG) Adj.

R-squared=0.02

(ACTIVITY)

R-squared=0.02

Adj.

of

potential

equation on the

associated

words, are

IAs

that

working

involved

the

his/her

about with

composite

questionnaire

auditor.

or In

internal as

principally

219

No

exhibit

principal

internal an

more concerned

directly

an IA's in

with of

is

MLC variable.

that

suggests

an IA's

by him/her.

seen to

were the

of

opinions"

MLC demanded

the

for

extent

audit

EAI situations

being

activity

"issuing

with

the

that

characteristics

negatively

less

are

suggests

terms

personal

auditors,

0.34)

related

explanatory

are

regression

(-2.12)

The first

responses

same two run.

and

independent

the

within

dependent

(2.36)

MCRR = -0.47

The second

the

Pearsonian

are:

0.28

+

the

group,

significant

(51.54)

other

the

Again,

set.

positively

IA

between

and

variables

regression-models

the

correlations

independent

=

for

presents,

product-moment

MLC

grOuR

auditor

such

internal

EAI

issues

auditing.

than

TABLE

14.5

CORRELATIONS: MULTIPLE

DEPENDENT

REGRESSION

AND INDEPENDENT

VARIABLES

AUDITOR

FOR-INTERNAL

GROUP

AGE

Exp

UND

KNO

ACT

PRE

MLC

03 .

01 .

03 .

15 .

06 .

00 -.

MCRR

01 .

08

08 .

-. 07

-. 14

05 .

Dependent

.

Indep endent , AGE

1.00

EXP

41 .

1.00

UND

20 -.

.

]KNO

-. 05

27 .

15 .

ACT

01 .

-. 03

03 -.

02 -.

PRE

12 .

28 .

10 .

23 .

04

1.00 1.00 1.00 -. 20

1.00

KEY TO VARIABLES AGE

Respondent's

EXP

Years

UND

Possession

KNO

Knowledge

ACT

Area

of

main

PRE

Frequency

of

use

MLC

minimum

Level

of

MCRR

Mean

of

age

in

bands

professional of of

Composite

of

experience

audit

professional of

Confidence

220

(UNDEGREE) (KNOWLEDG)

opinions

(ACTIVITY)

activity

audited

Refined

(EXPERIEN)

degree

a University issuing

(AGEYEARS)

years

accounts (MLC)

Response

(MCRR)

(FREQUENT)

imRlications

14.4

Summary

and

This

chapter

explores

characteristics in

EAI,

whether

of

Confidence

of

their

the

personal

affect

as measured

by

(MLC)

judgements

research

regressions

respondents

of

particular

of

and

their

their

a composite

on the

views

Level

Minimum

(MCRR)

assessment

twenty

EAI

on

in

situations

the

questionnaire.

Only

certain

then

only

develop

regression weakly

any

models it

fact,

In

so.

were

regression

significant,

was

equation

at

not

to

possible for

all

and

banker

the

group.

The

mainstream

for

groups,

0=

activity,

professional

significant

both

external

in

not)

with

the

was

internal

auditor

opposing

(signs)

and

interestingly

although

involved

(1 = closely

ACTIVITY

variable

direction.

The

positive

suggested to

act

greater

of

the

case

of

and

case in

greater

within

the

the

(external

auditors)

auditor's

ability

he/she

closer environment.

auditors),

auditor's the

EAI

the

(internal

internal

first

confidence

task

audit

specialism, terms

the

independently,

external second

in

sign

the

twenty

221

to

the in

Conversely, the

greater

involvement was

is

concern research

with

the his/her

registered situations.

the

extent main in

is

That

pursued

to

external

activity,

in

Other

developing

group

composite

of of

extent

the

Both of

their

Generally and

the

methodology, personal

of

immediacy

there

is

(personal) constraints this

no

characteristics

terms

suggestive

regard

to

the

EA environment.

power

of

more

than

being research

the

models

one

of

the

significant. instrument

of

influence

on respondent

views

222

in

a greater

the

of

a lack

opinions

managers

with

variables

suggests

audit

with

instance

the

internal

arguments

to

in

statements.

explanatory

of

by

financial

associated

noted

and:

by credit

with

of

demanded

issuing

complexity

the

independence

relationships

of

being

a group's

the

professed

consistent

or

of

auditors)

process

audited

however,

independent Within

the

terms

explanatory

on EAI.

Confidence

of

external

cognitive

task

understanding

Level

be of

views

positive

pursued

auditor

to

about

registered

are

increased

the

knowledge

use of

results

low

are

about

frequency

decision

is

assessment,

of of

auditors

of

or

MLC (Minimum

independence

in

relevance,

auditor

professional

an internal

or not

auditors,

the

main

auditing

external

1.

as his

appeared

expectations

the

an external

as his,

results

between

or not

auditing

or whether

internal help

whether

say,

and of

on EAI.

influences

To explore

specific

an attempt

was made to

of

(i.

firm

audit

(partner

or

The

only

significant

and

firm

size,

in

auditors,

it

was

noted

in

between the

more

by

basis

this

the

intrinsic or

in

external

Watts

or the

the

facts

arguments.

relationship rank

223

on EAI.

views those

are

ethical

their

suggest

determined within

contained

than

Further,

the

of

chapter,

Such

auditors.

of

association

(cues)

of

(1986].

Zimmerman

a strong

on EAI

rather

with

evidence

previous

background.

formulation

-a

empirical

and

users

scenarios,

Big-Six

inconsistent

and

and

chapter

audit

auditors

finding

indicate

of

by

demanded

significant

present

not

MLC

partner/non-partner -a

of

the

of

characteristics

for

views

on EAI.

confidence

of

theoretic

no

background

views

levels

agency

rank

was between

noted

auditor's

analyses

situations

relevant

EAI

personal of

views

nonBig-Six

that an

does

discriminant the

with

however,

findings

that

to

surprising

chapter

his/her

EAs being

of

theory

agency

and

higher

compared

and

Generally this

indicating

between

firm

the

the

was

nonBig-Six)

relationship

consistent

Thus

or

size

a respondent's

affected

non-partner)

as

finding

whether

Big-Six

e.

independence

the

see

on EAI,

views

on auditor

personal

information

is

pronouncements

EAI

In

terms

findings

of the

alone, to

able

research

provide

external operation

(by

influenced

or the

Thus,,

while

it

size

is

the

either

in

the

determinants any

form

of

[1987:

"an ranks

is

of "only

their mild

acculturation of

or

rank

of

the

(qualified)

audit

firm

the

the

within,

rank

EAI of of

held

to

by

1972] of

similar

research

for

support" is

taking

professionals 224

so firm.

audit

size

be no evidence

views

those

not

firm

and

of

taking

audit

size,

varying

of

is

this

or

of

size.

Farmer

of

regarding

et

al

auditor

independence,

own professional

effect

all rank

views

explaining

[Kelman,

supportive their

other

appears

firms

in

firm.

indicates

firms

across

10) who,

generated

to

within

rank

perceptions

in

at

auditor's

audit

of

own professional

there

respect

finding

This

that

"acculturation"

professionals similar

context

only,

with

place,

his/her

of,

the

either

not

views

are

research

size

the

MCRR variable),

on their

this

that

world"

by

of,

was

"real

possible

auditors

As such,

the

group

chapter

in

EAI

may be helpful

independence, for

this

regarding of

auditor

confirming

determined

or

external

underlying

means

within,

determinants

the

evidence

auditors

external

for

the

contention

place"

across

within

audit

that, the firms.

CHAPTER

XV

SUMMARY AND CONCLUSIONS

This

chapter

aspects

thesis,

from

its

is

the

of

this

provides

devoted

following

2.

Significance

3.

Possibilities

4.

Recommendations

it

the

of

limitation

"real

even

though

twenty

audit

from

the

of

the

from

research

research

research

this

of

results

the

is

research to

the

the

be true

actuality

fact

of,

that

or in

present

the

as

clones

derived from

that

themselves

from

of

reality,

responses

limitation.

225

and to

thus

them,

each

of

conceived

generally

were

situations

in

described

circumstances

situations

the

reality,

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suffer

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could

be undertaken

would

indeed

An area future

to

important

Assuming

changes

research,

it

be sensible

desired

would

As the

structure

of its

constant

change,

constant

evolution.

little

relation

at

to

external

Recommendations

15.4 The

needs

fact

situations with

EAI

registered, general

that

that is

concern

in

strong with

terms.

to

independence.

derived

from

least

many

of

evidence external

the of

these

240

the

in

twenty

notable consistent

auditor

the

research

some level

of

of

expectations

auditor

at

that

ensure

profession,

one

under

research

empirical cycles

under

also

are

and views

each

is

community

the

the

how the

assess

auditing

by

be suggested

cost

between

virtually

registered and

in

regular

and the

world

to

financial

or no gap exists

financial

to

Accordingly,

be undertaken

could

the

in

be examined

costs/benefits

were

impact

would

changes

EAI.

of

can

of

analysis.

changes

proposed

and other

that

issue

the

the

issue

the

concern

is

research

that

financial

with

ethical

research

empirical

ensure

the

satisfy

to

changes

be introduced.

should

introduction,

such

concerned

of

research,

guidelines

Thus,

communities

such

of

audit concern

concern and

independence.

was

despite

However,

important

more it, in

what

Thus,,

and

but

whether

that

is

very

to

pay

to,

such

and

independence

by

appease

fears

the

newly

the

CCAB, will

constituted very

fact, it

paramount, not

be paying

by

it

only

regard

to

that

is

can

never

being

or that

being

have

the

or but

fully merely,

addressed.

go some way to independence

more public

Practices such

of

and open within

non-auditors

just

that

(because

addressed

perceived

Auditing

241

audit

be declared,

should

the

the

regulation), are

then

and

be guaranteed

informed

likely

by

first

must

users

must

Indeed,

by suitably

in

to

terms

to

involvement

independent

established,

involvement

auditors.

in

profession

indicated

on EAI

professional

determine

remain

seen

ethical

relating

appearance.

be

same time

public

independence

of

on EAI.

legislation

concern

not

auditing

and

fact

is

to

must

be

as

the

in

safeguarded

Such overt

to

itself

EAI

of

but

in

At

profession.

areas

the

concerns

recognised

not

for

identified

be thoroughly

is

views

concerns

appearance

in

will

is

fact

the

impossible

users'

regard

Hence,,

it

is

important

fears

fully

independence

in

than

concern,

an auditor

audit

users'

be of

it

that

independence

that

consequential

rather

given

advance

fact

to

appears

fact,

and

the

Board

(APB) of

an effect.

In

identifying

for

be taken

should cognitive

the

if

Indeed, consistent further any

revised

The

auditor's

validity,

this

should

integrity

and

there

is

doubt

little

detailed

auditing

profession

independence

EAI

in

users it

auditor research

follows

appearance what

step

should those

towards

(professional) has

been

that

individual

of

(including

the

must

current problem,

in

that

covering

perceptions.

on such

independence

242

perceptions

rules

are,

the

in

statements specific

UK

auditors.

collective

perceptions

a contribution

to

boost

independence

a solution

the

provide

of

be based

but of

appearance

and

his

Thus,

precise

it

any

in

users

audit

the

financial

audited

his

specific,

the

in

recognition

auditors.

would

with

have

to

a significant

concept

concerned of

Determining first

the

since

research.

independence.

more

to

the

be explored

of

covering

with

this

due

belief

that

group

by

ultimately

professional

attributed

is

and

independence,

external

auditors),

for

guidelines

auditor

the

guidelines

on the

total

of

given

effectiveness,

varying

found

findings

relevant

depends

appearance

in

determined

fact

regard

suggested

is

ethical

However,

as

structure

livelihood,

yet

that

cognitive

and

EAI,

within

possibility

findings

analytic

and

may exist,

structures

factor

about

concerns

be the external and

direction.

this

APPENDIX LIST

A

OF ABBREVIATIONS

USED

AAA

American

ACA

Associate

of

ICAEW

ACACA

Associate

of

CACA

ACCA

Association

Accounting

ACMA

Associate

AICPA

American

Accountants

-

UK

below)

see

of

ICAI

or

Certified

of

(Now CACA -

Association

ICMA

Institute

Public

Certified

of

Accountants AMEX

American

Stock

known

(also

Exchange

as

ASE) ANOVA

Analysis

of Variance

APB

Auditing

Practices

Accountii

APC

Board

(UK) or,

Board and its

ng Principles

opinions

(USA) (precursor

Auditing

Practices

of the FASB) of the

Committee

CCAB

(UK) ARS

Accounting

Research

ASA

Australian

Society

ASB

Accounting

Standards

ASC

Auditing

Standards

Auditing

Statements

Accounting (UK)

Standards

(formerly

Steering

the

Committee

243

of

by

(issued

Study

AICPA)

Accountants (UK)

Board Board Board

of of

commlttee Accounting (ASSC)

the

or, AICPA

or,

UEC

the of

the

Standards

CCAB

ASE

American

ASR

Accounting

AUTA

Association

of

University

Accounting

(now

BAA)

BAA

Stock

Exchange

Series

British

as AMEX)

(SEC issued)

Release

Accounting

known

(also

Teachers

of

formerly

Association

AUTA) CA.

Member

CACA

Chartered

CAR

ICAS

CICA

or

Association

Certified

of

Accountants

(formerly

Commission

on Auditors'

the CCAB

of

ACCA) Responsibilities

of

Accountancy

Bodies

AICPA Committee

Consultative

of

(UK) CICA

Canadian

CIPFA

Chartered

Institute Institute

of

Public

Accountant

Public

Certified

of

Finance

and

(UK)

Accountancy CPA

Accountants

Chartered

of

(USA)

(member

AICPA)

DoT

Department

of

Trade

DTI

Department

of

Trade

EDP

Electronic

Data

FAS

Financial

and

Industry

Processing

Accounting

Standard

(issued

Accounting

Standards

Board

by

FASB) FASB

Financial

FCA

Fellow

of

one

FCACA

Fellow

of

CACA

FCMA

Fellow

of

ICMA

of

ICAEW,

244

ICAI

or

CICA

(USA)

GAAP

Generally

accepted

accounting

accepted

auditing

principles

(USA) GAAS

Generally

GAO

General

GEEC

Group

Accounting dletudes

(European

(USA)

Office

des

Experts

Accountants

(USA)

standards

Comptables

Study

Group)

IAS

International

Accounting

Standard

IASC

International

Accounting

Standards

ICAA

Institute

Committee

of

Chartered

Accountants

in

of

Chartered

Accountants

in

of

Chartered

Accountants

in

of

Chartered

Accountants

of

of

Cost

Australia ICAEW

Institute England

ICAI

& Wales

Institute

Ireland ICAS

Institute Scotland

ICMA

Institute

and Management

Accountants

(UK) IdW

Institut

der

in

Wirtschaftspruefer

Deutschland IFAC

International

IIA

Institute

MAS

Management

NYSE

The

New York

ROA

The

'Research

Federation of

Internal

Advisory Stock

of

Accountants

Auditors Services Exchange

opportunities

in

Auditing'

Program SAS

Statement

of

Auditing

245

Standards

(AICPA)

SE

Stock

Exchange

SEC

Securities

SFAC

Statement

and

(usually

London)

Exchange

commission

(SEC)

of

Financial

Accounting

Concepts

of

Financial

Accounting

Standards

(USA) SFAS

Statement (USA)

SIA

Society

SSAP

Statement

of

Investment

Analysts Accounting 09

Standard

of

Prac

ice

(UK) TAM

The

UEC

Union

Accountant's

United

des

Europeene

Economiques UK

Magazine

et

Kingdom

Experts

Financiers of

Great

Ireland us

United

States

USA

United

States

Comptables

of

America

246

Britain

and

Northern

APPENDIX

B

REMINDER AND SECOND COPY

AUDITORS OF EXTERNAL THEINDEPENDENCE RESEARCHQUESTIONNAIRE

For Completion By SelectedMembersof

UK AUDITORS OF INTERNAL THE INSTITUTE 13 Abbeville Mews 88 ClapharnPark Road London SW4 7BX

0

PARTICIPATION IN THIS RESEARCH AND RESPONSESTO THIS QUESTIONNAIRE WILL REMAIN STRICTLY CONFIDENTIAL.

0

PLEASERETURN YOUR COMPLETED QUESTIONNAIRE IN THE ATTACHED STAMPED ADDRESSEDENVELOPE BY JULY 31,1990.

THANKYOU VERY MUCH FOR COM[PLETINGTHE QUESTIONNAIRE

247

THEINDEPENDENCE OF EXTERNALAUDITORS RESEARCHQUESTIONNAIRE INTRODUCTION This questionnaireis designedto find out someof your views on the independence of is be to to the externalauditors.Theindependence attributed externalauditors oftensaid chief distinctionbetweentheirwork andthatof our profession.If this is so,it is important to know how we view the independence of externalauditors.Accordingly,your help in completingthis short questionnaireis greatly appreciated. Your participationin the will, of course,be keptTOTALLY CONFIDENTUL. researchandyour responses INDEPENDENCE DEFINED The questionnaireis about "External Auditor Independence".This is defined asthe quality of the auditor being objective, unbiased,and free from client influence.

COMPLETION QUESTIONNAIRE The questionnaireconsistsof three separatesections and instructions to complete each sectionareprovided within the relevant section. However, pleasenote the times at which you start and finish the questionnaireby filling in the box below and the one on page 10. TIME AT WHICH QUESTIONNAIRE COMMENCED:

II

SECTIONI This section presents 20 unrelated situations, each of which describes a particular Having between firm its clients. regardto the guidance a of one relationship auditorsand of given below, pleaseconsiderthe facts in each situation and then indicate the LEVEL OF CONFIDENCE you would havein therelevant auditor acting "independently"with regard to the client's next set of accounts.You should provide your responseby circling the appropriatenumberedlevel on the scalethat follows each situation. For this section you should: Consider only the information provided. I. 2. Respondon the basisof what you expectWOULD really happen,and NOT on the basisof what you considershould happen. 3. Assume the following (unlessspecifically otherwise indicated): a. The auditor is a "Top Ten" UK firm of charteredaccountants. b. The survival of the companybeing audited is not in doubt. c. The client's sharesare quoted on the London Stock Exchange. d. The fees earnedby the auditor from the company are small in relation to the auditing firm's grossfee income.

The endof this sectionposesa singlequestionon a generalised issue. this of aspect

248 1

SITUATION1. The auditorsto a large PLC have held office for the last 15 years and haverestricted their servicesto the PLC to only the audit function. What level of confidence have you in the independence of the firm of external auditors in tlýs Circle situation? your response at the appropriate numbered level on the scale alongside. L-

LEVELS OF CONFIDENCE NONE

VERY LOW

LOW

MEDIUM

HIGH

VERY HIGH

TOTAL

0123456

SITUATION2. A medium-sized retail companycontinuesto suffer from cashflow and liquidity problems and has delayed paying creditors where possible. Although the audit fee for the previous year has been paid, a significant invoice from the consulting companyassociatedwith the auditors is unpaid. What level of confidence have you in the independence of the firm of external auditors in this Circle situation? your response at the appropriate numbered level on the scale alongside.

LEVELS OF CONFIDENCE NONE

VERY LOW

LOW

MEDIUM

HIGH

VERY HIGH

TOTAL

0123456

SITUATION3. A firm of chartered accountants provides a private company employing about 100 employees Essentially in these the to certain accounting with services statutory audit. addition performing servicesarepreparingthe annual financial statements. What level of confidencehave you in the independenceof the firm of externalauditorsin thýs Circle your situat.ion? response at the appropriate nwnbered level on the scale alongside.

LEVELSOFCONFIDENCE NONE

VERY LOW 0123456

LOW

MEDIUM

-HIGH

VERY HIGH

TOTAL

SITUATION4. A firm of charteredaccountants hasbeenofferedthe auditof a reputableprinting and stationery companyon the unwritten condition that the firm would satisfy all its printing and stationery needsthroughthe company. In return, the companywould sell to theauditingfirm at wholesale firm Ile has acceptedthe audit. prices. What level of confidence have you in the independence of the firm of external auditors in UsI Circle situation? your

LEVELS OF CONFIDENCE NONE

VERY LOW

0123456

response at the appropriate numbered level on the scale alongside.

249 page

LOW

MEDIUM

HIGH

VERY HIGH

TOTAL

SITUATION5. A US corporationthat ranks in the top 100of the Fortunelisting has a fully-owned UK subsidiary. The auditors of, the US corporation are a "Big Eight" firm of CPAs and its overseas subsidiariesare audited by the local associatesof that firm. Exceptionally however, the UK is subsidiary audited by a medium-sized 15-partnerfirm. of chartered accountants. In relation to the UK subsidiaryonly: I What level of confidence have you in the independence of the firm of external auditors in Us Circle situation? your response at the appropriate numbered level on the scale alongside.

LEVELS OF CONFIDENCE NONE

VERY LOW

LOW

MEDIUM

HIGH

VERY HIGH

TOTAL

0123456

SITUATION6. A *firm of chartered accountantsis still owed the fees for the previous year's audit of a client when commencing the client's current audit. What level of confidence have you in the independence of the fi rm. of external auditors in Circle your this situation? response at the appropriate numbered level on the scale

LEVELS OF CONFIDENCE NONE

VERY LOW

LOW

MEDIUM

HIGH

VERY HIGH

TOTAL

0123456

alongside.

SITUATION7. A fmn of charteredaccountantshasits offices in an office block owned by one of its clients. The firm occupiesroughly 30% of the premises and the client and other tenantsoccupy the other 70%. The firm pays a fair market rental and the transactionappears to be on an arms-lengthbasis. What level of confidencehave you in the independenceof the firm of external auditors in this situation? Circle your response at the appropriate numbered level on the scale alongside.

LEVELS017CONFIDENCE NONE

VERY LOW 0123456

LOW

MEDIUM

HIGH

VERY TOTAL HIGH

8. SITUATION A partner in a firm of charteredaccountantsholds as a trustee, 7%.of the voting equity in a small listed company for which his firm actsasauditorsto the company.The partnerin questiondoes not in in the audit of the company and his shareholdingis clearly stated in the any way participate company's annualaccounts. What level of confidence have you in the independence of the firm of external auditors in tWs Circle situation? your response at the appropriate numbered level on the scale [alongside.

LEVELS OF CONFIDENCE NONE

VERY LOW

LOW

0123456

250

page

MEDIUM

HIGH

VERY HIGH

TOTAL

SITUATION9. A former partner in a fmn of charteredaccountantsis now the managingdirector of a large company, the audit for which he waspreviously responsible. The partnershipagreementprohibits participation by terminatingpartnersin future profits of the partnershipandpensionpaymentsbasedthereon. The firm of charteredaccountantscontinuesto act as auditors to the company. What level of confidence have you in the independence of the firm of external auditors in this Circle situation? your response at the appropriate numbered level on the relevant scale alongside.

LEVELS OF CONFIDENCE NONE

VERY LOW

LOW

MEDIUM

HIGH

VERY HIGH

TOTAL

0123456

SITUATION 10. The directors of a large and well-known public group company,exercisestrict financial control within the group. Like all costs,audit feesare carefully budgetedand controlled and are also agreed with the auditorsbeforeeachaudit commences.Budgetoverruns,if accepted,are done so after much discussionwith and explanationby the auditors. What level of confidence have you in the independence of the firm of external auditors in this Circle situation? your response at the appropriate numbered level on the scale

LEVELS OF CONFIDENCE NONE

VERY LOW

LOW

MEDIUM

HIGH

VERY HIGH

TOTAL

0123456

alongside.

SITUATION11. The UK subsidiary of a large US-basedmultinational group has a December31 year-endand like all other subsidiariesmust file its audited financial statementswith the US parent by the following January 12. In turn, the group parent releasesthe auditedgroup results by January 21.1n doing so the directors of the parent seekto presentthe image of an efficiently managedgroup. Given that an audit must take a minimum of time after the year-end and such audit deadlinesare not the norm in the UK, in relation to the UK subsidiaryonly: What level of confidencehave you in the independenceof the firm of externalauditorsin this Circle your situation? response at the appropriate numbered level on the scale alongside.

LEVELSOFCONFIDENCE NONE

VERY LOW 0123456

LOW

251 4

MEDIUM

HIGH

VERY TOTAL HIGH

SITUATION12. is theonly listedcompanyauditedby the firm. A client of a smallfirm of charteredaccountants, The feerevenue-generatedby this auditis approximately10%of thefirm's grossbillings. What level of confidence have independence in the of the you firm of external auditors in tWs Circle situation? your

LEVELS OF CONFIDENCE NONE

VERY LOW

LOW

MEDIUM

HIGH

VERY HIGH

TOTAL

0123456

response at the appropriate numbered level on the scale alongside.

SITUATION13. In addition to performingthe audit,theauditorsto a majorPLC haveprovidedit with management been These have the over advisoryonly andthe services past years. services always consultancy have fee. 40% billings the averaged about audit of year's related What level of confidence have independence in the of the you finn of external auditors in tMs Circle your situation? response at the appropriate

LEVELS OF CONFIDENCE NONE

VERY LOW

LOW

MEDIUM

HIGH

VERY HIGH

TOTAL

0123456

numbered level on the scale alongside.

SITUATION14. A PLC requestedtendersfor the auditof its annualaccountsandthe lowesttendererwasappointed intention its first below The firm the year'sestimatedcosts,with auditor. appointed tenderedmuch of morethanrecoveringthese"losses"in futureyears. What level of confidencehave you in the independence of the NONE firm of externalauditorsin tWs Circle your situation? 0 response at the appropriate numberedlevel on the scale ILIon,side.

LEVELS OF CONFIDENCE VERY LOW LOW 123456

MEDIUM

HIGH

VERY HIGH

TOTAL

SITUATION 15. An investment trust hasa shareholdingin a PLC. A director of the investment trust is also a partner in the PLC's auditors and is responsible for its audit. The size of the trust's holding in the PLC is in PLC the trust to the or not material either question. What level of confidence have you in the independence of the firm of external auditors in this Circle your situation?

LEVELS OFCONFIDENCE NONE

VERY LOW

0123456

response at the appropriate numbered level on the scale alongside.

252

LOW

MEDIUM

HIGH

VERY HIGH

TOTAL

SITUATION16. The 6-partneroffice of a TopTenfirm of charteredaccountants in a smallprovincialtownhasasone in its largest PLC, is the of clients;a:- medium-sizedmanufacturing employer thearea. which also What level of confidence have you in the independence of the firm of external auditors in Us situation? Circle your

LEVELS OF CONFIDENCE NONE

VERY LOW

LOW

MEDIUM

HIGH

VERY HIGH

TOTAL

0123456

response at the appropriate numbered level on the scale alongside.

SITUATION17. for the auditof a majorUK retailinggroup A partnerin anaccountingfirm recentlymaderesponsible firm itself its has been four finance director. While the auditors ago, accounting until years was, to thegroupfor manyyears,thepartnerin questionhas not beeninvolved in anyway with it or its auditduring theseyears. What level of confidence have you in the independence of the firm of external auditors in this

situation? response at numbered alongside.

Circle

your the appropriate

level

LEVELS OF CONFIDENCE NONE

VERY LOW

LOW

MEDIUM

HIGH

VERY HIGH

TOTAL

0123456

on the scale

SITUATION18. A small provincial office of a Top Ten firm of chartered accountantshasa manufacturingPLC it billings, its 20% While PLC the the accounts asone of clients. of office's gross generatesaround for less than 1% of the firm's total UK gross billings. What level of confidence have you in the independence of the firm of external auditors in this Circle situation? your response at the appropriate numbered level on the scale alongside.

LEVELS OFCONFIDENCE NONE

VERY LOW

LOW

MEDIUM

HIGH

VERY HIGH

TOTAL

0123456

SITUATION19. The chairman of a largeUK multinationalcompany,is alsoa life peeranda leadingfigure in the City of London.He is a director in severalpublic companiesandcarriesmuchpolitical clout. As a he is generallyregardedasa force to be reckonedwith. consequence, What level of confidence have you in the independence of the firm of external auditors in Circle your this situation?

LEVELS OF CONFIDENCE NONE

VERY LOW

0123456

response at the appropriate numbered level on the scale alongside.

253

LOW

MEDIUM

HIGH

VERY HIGH

TOTAL

SITT%'ATION 20. T= -naging director of a reasonablylarge private manufacturing companyhas a brother who is 2 --ex in the company's auditors. However he is NOT the partnerresponsiblefor the company's Wtx level of confidence have Lhe independence of the %' ,.-,L -AL L--- of external auditors in Circle your tEi.- kziation? at the appropriate =3: ý n=L-r--zd level on the scale

LEVELS OF CONFIDENCE NONE

LOW

VERY LOW

MEDIUM

HIGH

VERY HIGH

TOTAL

VERY HIGH

TOTAL

0123456

GENERALQUESTION W= !o you consider to be the OF LEVEL NEN-31UM Cal--EMENCE i=:. --=dcnce

in

the

of external that users of audited z== may statements Circle your j; s: ý, demand? z=cr. se at the appropriate d level on the scale n,

LEVELS OF CONFIDENCE NONE

VERY LOW

LOW

0123456

4

254 page7

MEDIUM

HIGH

THEINDEPENDENCE OF EXTERNAL AUDITORS RESEARCHQUESTIONNAIRE- SECTION2 AUDITORINDEPENDENCE AND INCORPORATIONOF AUDITINGFIRMS This sectionraisesissuesrelating to, and asksyour views on, the incorporationof auditing fmns and its implications for auditor independence. The UK governmenthasstatedthatin accordancewith theEighth Directive of theEuropean Economic Community, it will shortly permit professionalauditing/accountingfirms, which limited liability incorporate liability, to as currently operateaspartnershipswith unlimited companies. Incorporation may have implications for the professionalindependenceof auditors and thus the value given to auditedfinancial statementsby their users,particularly the business community. Accordingly, this sectionof the questionnaireseeksyour views on someof the important issuesunderlying the incorporation of accountingfirms. Having regard to by below, definitions the the next page questionson and clarifications pleaseanswer the circling the appropriateresponse.

DEFINITIONS An "INSIDE NON-PROFESSIONAL SHAREHOLDER" is one who is employed by the is incorporated but firrn not a qualified accountantwith a relevant of accountants, practising certificate. An "OUTSIDE SHAREHOLDER" is one who is not employed by the relevant incorporated firm of accountantsnor is a retired employeeof the firm or a trust holding shareson behalf of employees,former employeesor their dependants.

Pleasenow answerthequestionson thenext page.

255 page

THEINDEPENDENCE OF EXTERNALAUDITORS RESEARCHQUESTIONNAIRE- SECTION2 (continued) AUDITORINDEPENDENCE AND INCORPORATIONOF AUDITINGFIRMS PLEASE CIRCLE THE APPROPRIATE RESPONSE

QUESTIONS

RESPONSES

Do you consider auditor independence to be incorporation the of professional compatible with audit fmns?

YES

NO

PresentCompany Law in the UK requires an annual audit for all companies. If audit firms were incorporated, they would be audited by other audit fmns. Do you consider this a problem for auditor independence?

YES

NO

3(a) Should incorporated firms of accountants that be "INSIDE audits permitted perform NON-PROFESSIONAL SHAREHOLDERS"

YES

NO

2.

3(b) Assumingsuchpermissionis to be granted,should it be givenby: 3(c) If suchshareholdersweregrantedvoting rights, what percentagelimit should be placed on the proportion of voting rights permitted to be held by them? (The EEC Directive limits this to <50%) 3(d) Should that limit be set by:

COMPANYLAW ACCOUNTING BODY 25%-49% 10%-24% <10% COMPANY LAW ACCOUNTING BODY

4(a) Should incorporated fmns of accountants that be. permitted have perform audits to "OUTSIDE SHAREHOLDERS"? 4(b) Assuming suchpermission is to be granted,should it be given by:

YES

NO

COMPANY LAW

ACCOUNTINGBODY 4(c) If suchshareholders weregrantedvoting rights, what percentagelimit shouldbe placedon the proportion of voting rightspermitted to be held by them? (The EEC Directivelimits this to <50%) 4(d) Should that limit be set by:

25%-49% 10%-24% <10% COMPANY LAW

ACCOUNTINGBODY 256 Pape

THEANDEPENDENCE OF EXTERNAL AUDITORS RESEARCHQUESTIONNAIRE- SECTION3 This section asks for some anonymous personal details in order to allow a more meaningful and comprehensiveanalysisof the results of the questionnaire. PLEASE COMPLETE,OR CIRCLE AS APPROPRIATE YOUR AGE IN YEARS: 25-29

<25

2.

5-9

40-44

-

15-19

10-14

4S-49

20-24

50-54

25-29

MODEST

30-34

>34

EXCELLENT

DO YOU HAVE A DEGREE OR EQUIVALENT

TOTAL

ACADEMIC

QUALIFICATION:

NO

THE FREQUENCY WITH WHICH YOU USE AUDITED ACCOUNTS IS: NEVER

6.

>59

COMPANY ACCOUNTS:

YES

5.

55-59

YOUR KNOWLEDGE ABOUT ISSUING AUDIT OPINIONS IS: MINIMAL

4.

3S-39

YEARS OF EXPERIENCE USING AUDITEI) <5

3.

30-34

SELDOM

YOUR PRINCIPAL PERSONAL FINANCE INTERNAL AUDITING

AVERAGE

BUSINESS

ACTIVITY

01-FEN

ALWAYS

IS IN: FINANCIAL MANAGEMENT

CORPORATE FINANCE

CREDIT CONTROL AND MANAGEMENT

EXTERNAL AUDITING

TIME AT WHICH QUESTIONNAIRE COMPLETED:

OTHER

1

71

PLEASERETURNYOUR COMPLETEDQUESTIONNAIREBY JULY 31,1990,IN THE ATTACHED STAMPEDADDRESSED ENVELOPE. 2.

IF YOU WISH TO MAKE ANY COMMENTSON THE RESEARCH TOPIC,PLEASEDO SOBELOW AND ON THE REVERSEOF THIS SHEET.

THANK YOU AGAIN FOR YOUR HELP 257 page 10

APPENDIX TOP 20 1991

C (CHARTERED

UK AUDITING

FIRMS

*

STATISTICS

FIRM

ACCOUNTANTANCY)

CLIENTS

AUDIT-FEES

NAME

thousands

Em McLintock

253.7

12.3

Deloitte

246.4

10.0

& Young

181.5

8.5

Waterhouse

156.7

6.1

111.0

6.8

64.4

2.6

39.4

3.7

24.8

3.3

22.6

2.3

19.6

1.6

Marwick

1.

KPMG Peat

2.

Coopers

3.

Ernst

4.

Price

5.

Touche

Ross

6.

Arthur

Andersen

7.

BDO Binder

8.

Grant

9.

Pannell

& Lybrand

Hamlyn

Thornton Kerr

Forster

10.

Stoy

11.

Kidsons

Impey

15.6

2.2

12

Robson

Rhodes

10.2

1.1

13

Moores

Rowland

9.7

1.0

14

Clark

7.3

0.8

15

Neville

5.6

0.8

16

Baker

Tilly

5.1

0.7

17

Moore

Stephens

5.1

0.6

18

Finnies

5.0

0.6

19

Hacker

3.8

0.5

20

Milne

3.3

0.4

*S

ource:

Hayward

Whitehill Russell

Young Ross Accountancy

Age,

May

258

30,1991:

Page

I

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