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A positive theory of managers’ decisional behaviour in public accounting firms Wolf, Frank Michael

Abstract

In this study an attempt is made to better understand the audit process and the characteristics of the decisions effected on the audit by focusing on the work of individuals integrally involved with the audit. Specifically, attention is directed to the work of audit managers in large public accounting firms and two fundamental questions are: (1) What do audit managers do? (2) Why do audit managers do what they do on the job? In order to address the first question, a specification of managerial work in large public accounting firms is provided. For this purpose Flanagan's (1954) critical incident methodology is adopted. Flanagan (1954) has indicated that the functional description of the work of any group of individuals can be derived by gathering incidents critical to the effective or ineffective completion of their work. An extensive series of interviews was conducted in five public accounting firms in a large city in Western Canada for the purpose of implementing the critical incident methodology. Partners, managers and senior field staff participated in the study and provided a total of 582 critical incidents. These incidents were summarized and abstracted to yield 88 unique critical task requirements. Various validation procedures were implemented to ensure that the description of managerial work derived in this study was complete. In order to address the second question, attention is directed to the economic incentives which exist within the audit environment and the structural characteristics of the audit firm which may influence decision making on the audit. An assessment is made as to the way in which these factors influence the decision based behaviour of managers on the job. A positive theory of managerial decision making is developed. Such a theory will help us better understand the source of pressures which drive decision making in an audit context and the way different audit problems affect different groups of individuals in the audit firm. A positive theory is in many ways a precondition for answering normative questions about the audit process and decisions effected on the audit. The basic hypothesis investigated is that relative to what their partners would want them to do, managers will give a higher priority to conformance to those rules which can be readily monitored by their superiors. Conversely, managers will give a lower priority to conformance to those rules which cannot be readily monitored, or which can only be monitored at a prohibitive cost. Behaviour of this nature is entirely rational from the viewpoint of managers within public accounting firms. In addition, it is entirely rational for their partners to allow such behaviour. The test of the basic hypothesis makes use of a Q-sort methodology and draws extensively on the descriptive foundation which was provided by specifying what audit managers do. A Q-sort methodology is the general name used to characterize a set of philosophical, statistical, and psychometric ideas oriented towards research, on individuals. The Q procedure may be viewed as essentially a kind of rating procedure for rank ordering stimuli. In the context of this study, a Q-sort was developed which characterizes the work of the audit manager in terms of behaviours critical to the completion of his task. The Q-sort is then used to investigate whether audit partners and managers have similar perceptions about the nature of managerial work in specific decision contexts. Perceptions about the nature of the audit manager's work are expressed by rank ordering the cues in the Q-sort. Four Eastern Canadian offices of large public accounting firms participated in the Q-sorting phase of this study. One hundred and twenty-seven completed questionnaires were received from the partners and managers who participated at this stage of the research. Managers indicated how they typically respond to three broad decisional contexts. Partners indicated how they would want their managers to respond in those contexts. Significant differences were observed in partners' and managers' rank assignments with respect to the decisional cues in the Q-sort. Relative to what their partners would want them to do, managers give a higher priority to conformance to organizational rules which can be readily monitored within the firm. Conversely, managers give a lower priority to conformance to those rules which cannot be readily monitored or which can only be monitored at a prohibitive cost.

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