Ethical Dilemmas in Auditing: Dishonesty or Unintentional Bias?

Abstract

auditing, going concern, Moral Seduction Theory, Throughput Model, ethical dilemmas, self-fulfilling prophecy, litigation risk, whistle-blowing function,

Trusting/Distrusting Auditors’ Opinions

“…In this way, the auditor's opinion on their clients' ability to continue in existence is an act to establish trust with stockbrokers, creditors, investors, employees, and society. That is, financial statement users need to know the possibility that an organization may go bankrupt and the auditor is expected to deliver such critical information [6,36].…”

“…Furthermore, auditors' going concern opinions are often associated with Type Error I (i.e., firms that receiving a going-concern opinion survive in the subsequent year) and Type Error II (i.e., firms that do not receive a going-concern opinion but subsequently going bankrupt) [37]. While auditors' opinions should be rooted in normative reasons, previous research indicates that their decisions are subject to several economic incentives and psychological biases [6,7]. Uncertainty appears to be an unavoidable feature of trust.…”

“…The Throughput Model technique has been widely used to explore different financial and social issues such as lending [38,39], CEO's ethical reasoning [40][41][42], auditors' decisions with environmental risk information [6,7,43,44], information processing [45] and sexual harassment [46].…”

“…From the role-based trust point of view P → I → J → D, an auditor's decision to avoid a going concern opinion might be seen as a trustworthy behavior if the auditor takes into account the environmental conditions that affect a client's ability to survive. In deciding to issue a qualified audit report, auditors face the so-called "self-fulfilling prophecy effect", that is, a market belief that a going concern opinion will contribute to a client's failure due to its negative impact on creditors, investors, suppliers and customers who would lose their confidence in the company [6,7,44,73,88,89]. For instance, the issuance of a going concern opinion has been found to cause clients' stock price declines [90] and reduce a loan officer's willingness to approve a loan request [72,73].…”

“…The primary goal of the accounting profession is to enhance social capital by honoring public trust. Specifically, auditors contribute to society by assessing the truth and fair view of their clients' financial statements [5][6][7]. In honoring public trust, auditors should act as the guardians of third parties' interests rather than evaluate the consequences of their opinions in their relationship with their clients.…”