The Impact of Client Error-Management Climate and the Nature of the Auditor-Client Relationship on External Auditor Reporting Decisions

Abstract

ABSTRACT An important aspect of an organization's tone at the top is its practices for correcting the behavior of employees who deviate from set corporate policies and procedures (COSO 2013). Collectively, these practices are often referred to as an organization's error-management climate (EMC). We investigate whether a client's EMC can lead to behaviors that could reduce audit quality. We conduct an experiment and find that when a client's EMC is error averse (i.e., where employees are sanctioned for committing errors), external auditors indicate that client employees' errors discovered by the auditor are less likely to be reported. In addition, we examine the joint impact of the nature of the auditor-client relationship and EMC on auditor reporting. We find perceptions of reporting likelihood to be lower when the auditor is described as having a positive interpersonal relationship with the client employee responsible for the error. In addition, we find that this factor interacts with client EMC so as to exacerbate the observed reluctance to report when the climate is error averse. Our results provide initial evidence to suggest that an organization's EMC may impact auditor behaviors that could lead to reduced audit quality. Data Availability: Upon request.